The markets are on a roll with the benchmark Sensex touching an all-time high of 75,000 early this week. The reasons for the rally are not hard to fathom. There is good news all around—a hat-trick of 8 percent growth during the first three quarters of 2023-24, headline inflation showing steady signs of easing, followed by a revival of private consumption and investment. The only thing that appears bleak is corporate earnings.
The earnings season has just begun, but preliminary estimates suggest India Inc will likely turn in modest revenue and profit numbers for Q4. While the automobile, banking and pharmaceutical sectors will likely drive the earnings, others such as IT, oil & gas, and mining & metals are expected to either see declines or a plateau. The mixed bag reflects the diverse challenges faced by different sectors.
According to Kotak Institutional Equities, net profits of the 30 Sensex companies will likely increase by 5 percent year-on-year in 2023-24, and by 8 percent Q4-on-Q3, while the 50 Nifty index companies will likely turn in 4 percent and 7 percent growth, respectively. One of the reasons for the slower projected quarterly growth is a muted volume growth due to weak rural consumption. Consumer demand remains subdued overall, except for premium products, indicating low-to-middle single-digit volume growth for most consumer staple companies.
On the other hand, passenger vehicles, two-wheelers and alcoholic beverages are expected to post healthy growth driven by urban consumption. Overall credit growth, too, has been strong in 2023-24, which in turn will likely boost banks’ net interest margins. But other key sectors like IT, which has been struggling in the recent past, will likely disappoint markets with flat Q4 earnings on the back of weak discretionary spending by customers and the spillover effect of the previous quarter’s furloughs.
On balance, India’s macroeconomic fundamentals remain strong, with overall 2023-24 GDP growth likely exceeding the official estimate of 7.6 percent. Furthermore, the current fiscal’s growth is also likely to sustain at 7 percent, with risks evenly balanced. With retail inflation easing, if the nominal GDP registers 11-12 percent growth, the Sensex and Nifty will likely deliver healthy double-digit growth this fiscal. That said, the market is hostage to the usual mischief makers like volatile crude oil prices, interest rates trajectory and geopolitical uncertainties. Investors should tread with caution.