Motilal Oswal raises Nifty50 EPS outlook by 2.5% on robust corporate earnings
Motilal Oswal, a prominent financial services company, has revised its fiscal year 2024 earnings projection for Nifty 50 stocks upward by 2.5 percent to Rs 988. This adjustment is based on the strong corporate results observed, which are indicative of robust support for India’s optimistic economic outlook.
During the June quarter, Nifty companies displayed a noteworthy growth rate of 32 percent in earnings. The distribution of these earnings was particularly positive, with 62 percent of the analyzed Universe either meeting or surpassing profit forecasts.
Notably, the Nifty index outperformed expectations with a 22 percent year-on-year growth in EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), surpassing the initially projected 18 percent growth.
The revision in the Nifty 50 earnings per share (EPS) projection is attributed to significant upgrades in earnings forecasts for key companies such as Tata Motors, JSW Steel, Bharti Airtel, State Bank of India (SBI), and Kotak Mahindra Bank. Consequently, Motilal Oswal now anticipates Nifty EPS growth of 22 percent year-on-year in fiscal year 2024 and 16 percent year-on-year in fiscal year 2025.
This positive revision underscores the resilience and growth potential of Indian corporations, contributing to the overall optimism about the country’s economic trajectory.
The substantial growth in earnings was primarily driven by the strong performance of domestic cyclical sectors, particularly the Banking, Financial Services, and Insurance (BFSI) sector, as well as the automotive sector. According to Motilal Oswal’s analysis, BFSI companies reported an impressive 60 percent year-on-year surge in profits. Similarly, the automotive sector’s profits surged to Rs 17,900 crore from Rs 1,300 crore in the previous year.
Excluding Tata Motors, the automotive sector displayed remarkable strength, with an 83 percent growth in earnings for the first quarter of fiscal year 2024. This performance far exceeded the earlier projection of a 59 percent rise. The oil marketing companies (OMCs) sector also exhibited a significant transformation, shifting from a loss of Rs 18,500 crore to a profit of Rs 30,500 crore within the span of a year, largely due to robust marketing margins.
However, the metals sector posed a challenge to the overall corporate results, witnessing a substantial decline of 40 percent in earnings. This decline was predominantly driven by weak performances from key players such as Tata Steel (with a drastic -92 percent change), Vedanta (-81 percent), and Hindalco (-40 percent) on a year-on-year basis.
The diverse performance across sectors highlights the dynamic nature of India’s corporate landscape. While certain sectors experienced robust growth driven by domestic demand and favorable market conditions, others faced challenges that impacted their earnings. This mix underscores the complexity of India’s economy and the various factors that contribute to corporate earnings dynamics.
In the IT services sector, the performance was relatively subdued, marked by a consistent median revenue growth in constant currency (CC) on a quarter-on-quarter basis. This stability in performance was noteworthy, particularly considering that this period is traditionally characterized by strong seasonal growth patterns.
Within Motilal Oswal’s universe of companies (MOFSL Universe), the performance displayed a mix of achievements and challenges. Among these companies, 36 percent managed to exceed the earnings predictions, while 38 percent fell short of the projected profitability at the Profit After Tax (PAT) level.
Looking forward to the earnings trend for the MOFSL Universe in fiscal year 2024, the ratio of earnings upgrades to downgrades slightly tilted in an unfavorable direction. Among the tracked companies, 66 reported earnings upgrades exceeding 3 percent, while 76 experienced earnings downgrades of over 3 percent.
Furthermore, when excluding the Financials sector, the Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) margin for the MOFSL Universe demonstrated a substantial annual increase. The EBITDA margin surged by 330 basis points to reach a level of 17.6 percent. This indicates an improvement in operational efficiency for the companies within the universe.
The mixed performance across sectors, along with the challenges faced by some companies, underscores the dynamic and evolving nature of India’s corporate landscape. Various internal and external factors contribute to the varying degrees of success or challenges faced by different sectors and individual companies.
Motilal Oswal anticipates the momentum of robust earnings growth to continue, projecting a growth rate of over 20 percent for the Nifty index in fiscal year 2023-24. The brokerage expects the profit pool of the companies within the MOFSL Universe to achieve a substantial 33 percent year-on-year growth in the same fiscal year, surpassing the significant milestone of Rs 10 lakh crore.
Currently, the Nifty index is trading at a 12-month forward price-to-earnings (P/E) ratio of 18.5x. This valuation represents an 8 percent discount when compared to its own long-term average (LPA) P/E ratio. Motilal Oswal maintains its ‘overweight’ stance on sectors such as financials, consumption, and automobiles, indicating a positive outlook for these segments. Conversely, the brokerage holds an ‘underweight’ position on sectors like metals, energy, and utilities, suggesting a more cautious approach toward these industries. Additionally, Motilal Oswal maintains a ‘neutral’ stance on sectors including IT, healthcare, and telecom within its model portfolio.
These strategic stances reflect Motilal Oswal’s perspective on the varying growth potential and investment opportunities across different sectors within the Indian economy. By adopting these positions, the brokerage aims to optimize investment decisions and allocate resources based on its assessment of sectoral prospects.
