Banks, automakers likely to lead earnings growth in Q4

Earnings estimates analyzed by Mint for 37 of the Nifty 50 companies, excluding banking and financial services, show revenue will grow 11.4% from a year earlier, while profit growth is projected to be significantly lower at 4.2%. However, net profit growth for Nifty-50 companies, including banking and financial services, is projected to grow at 10.7% in the March quarter, underscoring the role played by banks in driving overall earnings growth.

While manufacturing firms are likely to face continued margin pressure due to input cost increases from a year earlier, they may see some relief sequentially from the December quarter.

While very good earnings are expected from financials, particularly in banking, automobiles and capital goods sectors, metals and utilities are likely to report subdued performance, analysts said.

“Directionally, the quarter is unlikely to be very different from September and December quarters with the margin improvement being visible sequentially and banks driving a large part of the overall earnings growth for the markets,” said Manish Jain, fund manager, Ambit Asset Management.

Nifty 50 operating margins (excluding financial, telecom and commodities) are likely to remain flattish, Jain said.

Strong operating earnings growth is likely to be seen in banks (strong loan growth and lower credit cost) and auto (margin expansion and better realization), said analysts. However, weakness in operating earnings is likely in metals (lower realization), utilities (Coal India), and NBFCs (weakness in housing finance companies), feel analysts.

Other sectors not part of Nifty50 but are expected to do well include hospitality and airlines, according to Nishit Master, portfolio manager, Axis Securities PMS. Sectors that might witness earnings pressure include consumer discretionary, metals, and utilities, Master said, adding that cement might witness YoY earnings pressure, a sequentially should benefit from lower energy costs.

V.K. Vijaykumar, chief investment strategist at Geojit Financial Services, said the markets would discount the earnings of banks before the publication of results. State-run State Bank of India and Bank of Baroda have the potential to outperform, he said, adding that the signs of pick up in capex also augur well for the capital goods segment, which will post a good set of numbers.

For banks, the management commentaries on loan growth and net interest margin (NIM) trajectory to figure out the pace of moderation would be closely tracked. Banks are likely to report strong earnings growth with decadal-high return on assets during the quarter, helped by low credit cost, strong loan growth, and stable NIMs.

NBFCs, however, could continue to face marginal margin pressures due to higher interest rates and elevated competition from banks.

According to Deepak Jasani, head of retail research at HDFC Securities, IT services may report modest year-on-year growth in net profit due to fewer working days in January and muted constant currency revenue growth during the seasonally weak March quarter. Meanwhile, consumer staples are expected to show modest volume growth and an improvement in gross margin, while pharmaceuticals are expected to see weakness in US sales offset by healthy domestic sales.

Overall, auto and financial services are expected to be the key growth drivers, with analysts at Motilal Oswal Financial Services expecting the segments to report 107% and 56% earnings growth from a year earlier. On the other hand, metals and oil and gas are expected to decline 44% and 13%, respectively, according to the brokerage.

There is a high possibility of further upgrades in the financials, auto and even capital goods sectors. The pharma sector could be a dark horse that might surprise us positively, while downgrades are possible in the consumer discretionary and chemical sectors, according to Axis’s Master.

Rural demand recovery is showing some green shoots, experts said. Comments from industry leaders in segments like automobiles indicate a pick up in rural demand, pointed out Vijaykumar, who highlighted that Maruti and Hero Motors have commented that rural demand is higher than urban demand.

However, now the analysts are also watchful about how the upcoming monsoon pans out. If this year’s monsoon is not normal, then the demand recovery in the rural market might get further delayed, said Axis’s Master.