Results preview: Nifty 50 earnings likely to enter slow lane in Q3

Brokerages have cut benchmark index's forward earnings estimates

If estimates of brokerages are anything to go by, there will be a sharp decline in the earnings growth of Nifty 50 companies in October-December 2023 (Q3FY24) on a year-on-year (Y-o-Y) basis from strong double-digit growth in the previous three quarters.

Growth in the combined revenue of India’s top 50 companies, too, is expected to remain tepid and is estimated to grow in single digits for the third consecutive quarter.

According to various estimates, the combined net profits of the Nifty 50 companies are expected to grow 13.3 per cent Y-o-Y to Rs 1.73 trillion in Q3FY24, a sharp slowdown from the 28.6 per cent Y-o-Y growth in Q2FY24 and 34.8 per cent Y-o-Y growth in the first (April-June) quarter of 2023-24.

This will be the lowest combined net profit for the index companies in the last four quarters. And, it is despite the low base of last year, when the combined earnings of the sample had grown by just 3.1 per cent Y-o-Y to Rs 1.53 trillion in Q3FY23. The index companies in our sample had reported a combined net profit of Rs 1.81 trillion in September 2023 quarter (Q2FY24) and an all-time high quarterly net profit of Rs 1.85 trillion in Q4FY23. 
 

A likely slowdown in earnings has prompted some brokerages to cut the benchmark index’s forward earnings estimates.

“We have cut our FY24E Nifty earnings per share marginally by around 2 per cent to Rs 976 and while FY25E Nifty EPS is stable at Rs 1,142. We now forecast the Nifty EPS (earnings per share) to grow 21 per cent/17 per cent in FY24/FY25,” write analysts at Motilal Oswal Financial Services.

Brokerages expect a further expansion in the operating margins of the top companies of India Inc in Q3FY24, driven by gains from lower prices of commodities and energy. “EBITDA (earnings before interest, tax, depreciation and amortisation) margins are likely to expand by 186 basis points Y-o-Y basis, touching 19.4 per cent, the best seen in the past 7 quarters, however sequentially the number is growing by a mere 4 bps,” write analysts at YES Securities.

However, overall corporate earnings in the third quarter will be adversely affected by a likely slowdown in banking, financial services and insurance (BFSI), information-technology (IT) services, fast-moving consumer goods (FMCG), and oil and gas.

While the combined net profits of IT services firms such as Tata Consultancy Services, Infosys, and HCL Technologies are expected to be flat on a Y-o-Y basis, earnings growth in BFSI, oil and gas, and FMCG is projected to be in single digits.

In comparison, automobile and mining and metal companies are expected to report high double-digit growth in their combined net profits in Q3FY24. However, it will not be enough to compensate for a slowdown in other sectors. Nearly 70 per cent of the Nifty50 companies’ combined net profits were accounted for by companies in BFSI, oil and gas, and IT services in Q3FY23. Automotive and mining and metal companies, on the other hand, accounted for only around 10 per cent of index companies’ earnings last year.

The combined net profits of the Nifty50 companies excluding BFSI are expected to grow about 16 per cent Y-o-Y to Rs 1.19 trillion in Q3FY24, down from 35.7 per cent Y-o-Y growth in Q2FY24 and 30 per cent Y-o-Y growth in Q1FY24.

Again, the slowdown in growth is despite the year-ago quarter witnessing a decline of 9 per cent Y-o-Y in the combined earnings of Nifty 50 excluding the BFSI sample. In comparison, the combined net profits of Nifty50 companies’ [ex-BFSI, oil & gas and mining & metals (or ex-cyclicals)] are expected to grow 13.1 per cent Y-o-Y to Rs 0.77 trillion (Rs 76,930 crore) in Q3FY24, which is again lower than the 20.7 per cent Y-o-Y growth in Q2FY24 and 39.5 per cent Y-o-Y growth in Q1FY24.

The index companies’ combined net sales (net interest income in the case of BFSI companies) are expected to grow 6.1 per cent Y-o-Y in Q3 of FY24, a slight improvement from the 3.8 per cent Y-o-Y growth in Q2FY24, but a substantial slowdown from the 17.5 per cent Y-o-Y growth in Q3FY23.

The Business Standard analysis is based on quarterly finances of 46 Nifty50 companies whose earnings estimates are available for Q3FY24. The four index companies that are not part of the sample (as estimates are not available) include Bajaj Finserv, Adani Enterprises, HDFC Life Insurance Company, and SBI Life Insurance Company. These four companies together accounted for only 1.6 per cent of the combined net profits of Nifty50 companies in Q2FY24.

The numbers for the past quarters, however, include the erstwhile Housing Development Finance Corporation (HDFC), which merged with HDFC Bank in July this year. The housing finance major had reported a net profit of Rs 3,691 crore on a standalone basis on a net interest income of Rs 5,536 crore in Q3FY23. It was the 13th most profitable firm on the index last year.

For the first time in many years, four of the five most profitable index companies -- HDFC Bank (including HDFC), Tata Consultancy Services, Oil & Natural Gas Corporation, and State Bank of India  -- will either report a Y-o-Y decline or low single-digit growth in their net profit in Q3FY24, estimate brokerages. Reliance Industries could be an outlier with an estimated 13 per cent Y-o-Y growth in net profits in the third quarter. These five companies together contributed 40 per cent to Nifty50 earnings in Q3FY23.