Motilal Oswal Financial Services (MOFSL) has provided an insightful analysis of the corporate earnings landscape for Q2, forecasting that this will mark the slowest earnings growth for Nifty companies in the past 17 quarters. This deceleration in growth is attributed to a mix of favorable and unfavorable factors affecting multiple sectors, reflecting a nuanced economic environment.
After witnessing a period of robust double-digit growth spanning four years, the corporate earnings slowdown is driven by several critical pressures. These include rising commodity prices, tapering benefits from improved asset quality in the Banking, Financial Services, and Insurance (BFSI) sector, a high base comparison from the previous year, and overall declining consumer demand. This points to a significant shift in market dynamics as companies navigate through these challenges.
In light of these trends, MOFSL anticipates a modest earnings growth of only 2 percent for Nifty companies during the July-September quarter. The earnings before interest, taxes, depreciation, and amortization (EBITDA) margin—excluding financials—is expected to decrease by 40 basis points year-over-year to about 20 percent. This decline is primarily impacted by oil marketing companies (OMCs) and the diminishing favorable conditions that had previously lifted performance due to high comparative bases.
Interestingly, earnings growth in Q2 is projected to be led by the BFSI sector, which is expected to experience an 11 percent year-on-year increase. Additionally, other sectors such as healthcare are forecasted to rise by 15 percent, utilities by 24 percent, while the telecom sector shows signs of recovery with losses anticipated to shrink dramatically from ₹4,300 crore the previous year to ₹400 crore in September 2024. These sectors are emerging as key drivers in a challenging environment.
Conversely, cyclicals may pose a downside risk to overall earnings growth. The oil and gas sector and cement industry are expected to face significant declines of 33 percent and 41 percent, respectively. Meanwhile, the metals and automobiles sectors are projected to report only limited single-digit growth. In contrast, sectors like real estate are predicted to rise by an impressive 44 percent, retail by 17 percent, capital goods by 13 percent, and consumer goods by 4 percent. This uneven growth landscape underscores the mixed performance anticipated across different industries.
Strategic Stock Picks by MOFSL
Looking ahead to FY25, MOFSL envisions a more balanced outlook for corporate earnings, aligning growth trajectories more closely with revenue trends across the board. This perspective is crucial for investors seeking to navigate the upcoming fiscal landscape.
In response to the shifting earnings landscape, MOFSL has recalibrated its model portfolio, emphasizing a strategic selection of stocks. In the large-cap segment, the brokerage expresses confidence in ICICI Bank, HDFC Bank, L&T, HCL Tech, Hindustan Unilever Limited (HUL), Mahindra & Mahindra (M&M), Power Grid, Titan, Bharti Airtel, and Mankind Pharma as top investment choices. For mid-cap and small-cap segments, notable picks include Indian Hotels, Angel One, Godrej Properties, Persistent Systems, Metro Brands, PNB Housing, Global Health, Cello World, Dixon Technologies, and Five Star Business Finance. These selections reflect an adaptive approach aimed at capitalizing on emerging opportunities while mitigating inherent market risks.
