HDFC Securities Q2FY24 Analysis:: Sectoral Divergences and Outlook

HDFC Securities Q2FY24 Analysis:: Sectoral Divergences and Outlook

HDFC Securities Q2FY24 Analysis:: Sectoral Divergences and Outlook

The earnings season for the second quarter of FY24 exhibited a mix of performances, with significant variations across different sectors and companies. HDFC Securities highlighted the continuation of input cost deflation as the central theme of the quarter, aiding profitability despite subdued year-on-year (YoY) revenue growth.

• The brokerage anticipates that the phase of commodity cost deflation benefitting earnings is nearing its end, and future earnings growth will need to be driven by volume.

Performance Across Market Caps and Sectors

• Large-cap stocks within HDFC Securities’ coverage showed a robust 37 percent YoY growth in incremental earnings, while midcaps grew by just 12 percent YoY.
• Earnings growth was predominantly concentrated in three sectors: energy (56 percent), auto (16 percent), and lending financials (16 percent).
• Sectors showing strong YoY earnings growth included auto, lending financials, industrials, real estate, energy, cement, and pharma. In contrast, staples, metals, chemicals, IT, and consumer discretionary sectors lagged.

Future Earnings Projections

• HDFC Securities projects earnings growth for its coverage universe at 29.2 percent for FY24E and 7.5 percent for FY25E, considering continued margin recovery and demand momentum.
• Excluding the energy sector, the growth figures for FY24E and FY25E stand at 18.8 percent and 15.5 percent, respectively.

Valuations and Market Outlook

• The Nifty 50 index valuations seem more reasonable at 17.5 times the FY2025E EPS, given moderate earnings growth.
• HDFC Securities pointed out several factors to monitor in H2FY24, including weather conditions (El Nino), geopolitical tensions, potential credit events, US economic trends, credit costs in India, persistent inflation, and the 2024 general elections.
• The earnings momentum in India may slow due to uncertain export and rural demand conditions, with present forward valuations close to long-term averages.
• The Market Cap to GDP ratio for India is currently high at 109, compared to an 18-year average of 80.

Investment Strategy and Portfolio Management

• HDFC Securities advises investors to not be complacent and suggests an asset allocation review to potentially reduce equity exposure.
• It recommends a portfolio review to eliminate non-performers and take profits in overvalued stocks, creating an opportunity to deploy funds during weaker market periods.
• The Nifty 50 index is trading at 20.3x FY24 and approximately 17.6x FY25 consensus EPS, indicating fair valuations on an FY25 basis with a balanced risk-reward scenario.

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