Q3 Earnings May Cause Jitters in Market Sentiments, Here’s How?

The poor earnings showdown of India Inc has taken a heavy toll on investors' appetite since Q1FY25, and can continue to dampen the market sentiments in the third consecutive quarter as street majors are set to report their Q3 earnings from tomorrow. With persistent downgrades and share target price cuts amid muted earnings, December numbers are unlikely to change.

Prateek Parekh of Nuvama Institutional Equities said, “A recovery in topline and profits seems very gradual, potentially disappointing consensus. Nifty EPS is likely to grow 2% (versus 4% in H1FY25) – posing downgrade risks to the H2FY25 consensus estimate of mid-teens growth. This along with elevated valuations and tightening liquidity warrant caution.”

Earnings slowdown are now being driven by poor demand health rather than liquidity problems.

How are banks expected to perform?

Banks are expected to remain under pressure on the back of poor earnings, muted loan growth led by deposit pressures and Net Interest Margin (NIM) pressure, Nomura forecasted.

HSBC notes that profit of banks can decline by 4% on QoQ basis, while Motilal Oswal Oswal has warned of higher credit costs that could steer a sharp decline in earnings spanning across mid-size private banks.

Amid slowdown in unsecured retail and moderating demands in secured segments, credit growth declined to 11.5% from 16%.

IT Revenue forecast

Q3 earnings of IT majors are expected to remain weak, buoyed by holidays and furloughs, therefore financial results are set to remain uncertain.

Nomura analyst Abhishek Bhandari said, “While a strong recovery in discretionary demand may take a few quarters, it is unlikely to worsen further, in our view. The onset of the interest rate-cutting cycle and a potential thaw in decision-making by US corporates post-US elections in Nov 2024 could provide a fillip to demand.”

Auto Sector

Despite the festive cheer, OEMs are expected to report a volume growth of just 6% YoY, Motilal Oswal noted. The brokerage said, “ While two-wheeler demand weakened in Q3, passenger vehicle OEMs saw better demand uptick, especially in the festive season. Tractor demand saw a marked revival in Q3, a clear indicator of improving rural sentiment. However, commercial vehicles continued to see weak demand.”

The brokerage also downgraded estimates for 7 out of 26 companies.

FMCG

The FMCG sector is set to report muted earnings in Q3 amid sluggish urban demand, poor winter portfolio, surging palm oil prices, thereby impacting personal-wash portfolio, Motilal said.

Antique Stock Broking said, “The demand sentiment for FMCG products remains muted with low single-digit volume growth. Paint segment profitability could be impacted by higher promotional activities. In alcobev, all companies may deliver double-digit volume growth in P&A brands.”

Can OMCs report strong growth?

Oil marketing companies can report strong set of earnings, buoyed by surging high petrol/diesel marketing margins, QoQ GRM recovery, QoQ diesel volume recovery etc. despite the likely provisioning for LPG under-recovery, analysts said.

Reliance Industries (RIL) is expected to report strong YoY/QoQ figures after posting muted earnings in the past two quarters.

What should investors do?

Nuvama is overweight in private banks, insurance, telecom, pharma, consumer, cement, and chemicals. It is underweight in industrials, metals, power, PSU banks, and NBFCs.

While being overweight on commodities and insurance, CLSA is betting big on CLSA underweight on IT, discretionary, industrials, and healthcare.

CLSA said, “Underperformance of actual capex spending versus expectations and rising tailwinds for affordable consumption make us favor this sector and raise staples to a big overweight.”