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The Q2-FY24 earnings season closed with a positive undertone, said Emkay Global Financial Research. The margin loss of FY23 is recovering incrementally, aided by lower commodity prices. Nifty earnings forecasts held up during this period, with a two per cent upward revision for FY24.
Going forward, the Consensus EPS for the Nifty looks resilient, though there seem to be some worries at the individual stock level. “We are constructive on the market for the medium term; near-term worries are also steadily dissipating,” it added.
Energy companies boost earnings
According to the domestic brokerage, the profit growth remained impressive, but that was mainly on account of energy firms.
The impressive headline earnings (BSE 500 PAT: +41 per cent y-o-y) are distorted by 171 per cent growth from Energy, with a large swing from oil PSUs. Adjusted for this, Non-financials delivered 58 per cent y-o-y growth, while Financials saw PAT growth at 21 per cent. “Much of the profit growth was driven by margin improvement, as topline for Non-financials was tepid at (0.6 per cent). One idiosyncratic feature was that the delayed festival season hurt topline growth for consumer companies, Emkay said the research report.
Tata Motors in driver seat
Consumer Discretionary (+72 per cent y-o-y) and Financials (+21 per cent y-o-y) were the other movers of the BSE500 profits, according to the brokerage findings. The CD sector was propped by the Tata Motors turnaround, but there was widespread participation too — a third of the companies reported 20 per cent PAT growth.
IT, Consumer, and Materials delivered soft numbers, with 3-10 per cent growth. Industrials and Real Estate also logged strong growth, though their contribution to the aggregate is negligible.
Forecasts remain resilient
The results were in line. 46 per cent of Nifty companies surprised positively against Consensus (vs 56 per cent in Q1-FY23), while the ratio of positive-to-negative surprises was strong at 1.44, marginally down q-o-q.
For the Emkay universe, the share of positive surprises was almost flat at about 38 per cent. The Nifty EPS estimates saw a small 2 per cent uptick from 30-Sep-2023, though they are still down 3 per cent from 31-Mar-2023 levels. The Nifty forecasts look reasonable, with the implied growth for 2H at 19 per cent.
The forecasts for the broader universe are more challenging, with Consensus building in faster y-o-y growth in H2-FY24 (vs H1-FY24 y-o-y growth) in around 50 per cent of the companies (for a 278-stock universe with coverage by more than 10 analysts). The FY23 downgrade trend is unlikely to recur, but there are granular risks.
Strong cash flows
BSE500 cash flows continued to strengthen. At an aggregate level, OCF growth was at 135 per cent y-o-y, while FCF also saw growth, at 78 per cent y-o-y. The OCF/EBITDA ratio has bounced from the abysmal 38 per cent in 1HFY23 to 88 per cent (FY23: 77 per cent), probably implying that the worst of working capital pressures are now over.
The improvement was across the board – Energy, Industrials, Consumer Discretionary, Healthcare, and Utilities all delivered better outcomes. Our read-through is that the volatility in input prices was probably the cause of stress in H1-FY23 and cash flows are now normalising, Emkay said.
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