For India Inc., the end of the downgrade cycle is in sight

There has been no significant disappointment in quarterly earnings so far and many firms have outperformed expectations. Hence, without any negative surprises, consumption is expected to pick up in the second half of the fiscal.

Mitul Shah, Head of Research, Reliance Securities, said the first quarter has seen more upgrades than downgrades. However, the IT sector has seen a decline due to moderation in New Deal wins and increase in manpower and travel costs. Meanwhile, some mid-cap stocks and the engineering sector have recovered, driven by a moderation in commodity prices.

Amnish Agarwal, head of research, Prabhudas Lilladher Pvt Ltd, said that five of the Nifty 50 companies have upgraded FY24 earnings estimates, 21 have retained earnings estimates, and only four have seen a downgrade. Ltd.

Manish Jain, fund manager, Coffee Can PMS, Ambit Asset Management, said that the cycle of declining earnings is clearly behind us. He added that apart from IT services, there is no growth pressure. “We believe that earnings improvement is starting to happen in bits and pieces. We believe the September quarter will be an important quarter to watch in terms of earnings trajectory,” Jain said.

“As inflationary pressures ease, H2FY23 is expected to outperform, provided we do not have any other downside trigger till then,” said Deepak Jasani, Head of Retail Research, HDFC Securities.

While the pressure on manufacturing firms’ operating performance was expected, and many companies reported a gradual decline in operating profits due to rising input costs, analysts said volume growth remained strong and cost pressures may start to ease by the second half. Because commodity prices have softened. , In addition, a pick-up in consumption, especially rural demand, will also lead to an increase in income. “One of the major surprises for us in this result season has been the consolidation in consumption demand. We certainly weren’t expecting volume growth to accelerate on a sequential basis. But, surprisingly, rural demand has also started showing some green shoots,” said Jain of Ambit Asset Management.

The revenue growth of the Nifty 50 firms has been aided by both rising volumes and price increases. Analysts said the banking and financial services sector supported the Ebitda (earnings before interest, tax, depreciation and amortization) of Nifty companies.

Data compiled by Mint shows that out of 34 Nifty 50 companies, net sales growth has remained strong at 27.1% year-on-year. However, overall spending has grown exponentially at 22.8%. Ebitda grew at a slower pace of 15.2%, in line with a 15.4% increase in net profit.

“Growth is driven by cyclical sectors such as banks, capital goods and consumption. The contraction was driven by metals, auto, IT and cement,” said Shah of Reliance Securities. In terms of expectations, there are more beats than misses, said Shah.

Most analysts maintain a positive outlook on banks that have underperformed for a while. Ambit’s Jain said, “Definitely the banks look very promising as credit growth has been strong, asset quality is also good, and we would expect NIM (net interest margin) to expand in the coming quarters as well.”

Within the companies under Motilal Oswal Financial Services universe, state-run banks, telecom, metals and consumer sectors reported 11%, 10%, 6% and 3% growth in FY13 earnings, respectively.

Analysts at ICICI Securities Ltd said that even in cement, where heavy cost pressures were seen, the cycle of decline in earnings is largely behind. Instead, investors will focus on regional demand-supply dynamics, market share gains, cost efficiencies and balance sheet strength, he said in a note.

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