India Market Update: August 2024

The Indian market concluded July on a high note, extending its winning streak for a second consecutive month. This positive momentum was driven by significant sector rotation, which has played a pivotal role in sustaining the Nifty 50 index at elevated levels. Despite some volatility due to the much-awaited budget under the Modi 3.0 government and the quarterly earning session, investors have remained bullish, driving the market to record high levels. Overall, the FY2025 Union Budget announced on 23rd July 2024, delivered a balance between capital expenditure, fiscal prudence and welfarism.

Indian equity markets witnessed a sharp correction on August 5 following fears of a recession in the US, fresh tensions between Iran and Israel, and a plunge in Japanese shares due to the rapid appreciation of the yen. However, markets have since bounced back thanks to robust macros, a domestically oriented economy, and companies’ ability to provide relatively stable returns during economic downturns. India’s robust earnings growth and strong domestic fund flows are expected to continue supporting equities.

Valuations

As of August 7, the Nifty 50 index trades at a 21.99x, which is at a premium of just ~2.23% compared to its 5-year average of 21.50x. With relatively better earnings and profitability in FY2025, large caps now appear relatively reasonably valued.

Graph: Valuations & Earnings of Nifty 50 Index

Earnings Update

Overall earnings growth was driven by domestic cyclicals, such as Automobiles (+34% YoY) and BFSI (+19% YoY), with improved contributions from Healthcare (+19% YoY), Real Estate (+80% YoY), and Capital Goods (+14% YoY). Conversely, earnings growth was weighed down by global cyclicals, such as Oil & Gas which saw a dip of 49% YoY, along with Metals (-5% YoY), Cement (-2% YoY) and Speciality Chemicals (-16% YoY).1

Earnings of the 45 Nifty companies that have declared results so far grew 5% YoY, fuelled in large part by HDFC Bank, Tata Motors, ICICI Bank, Maruti Suzuki and TCS. These five companies alone contributed 131% to the incremental YoY accretion in earnings. Conversely, BPCL, JSW Steel, Reliance Industries, and Asian Paints contributed adversely to Nifty earnings. 15 companies within the Nifty reported earnings beats while 25 companies reported below expectations. In terms of sales growth, 23 companies reported beats, 3 reported in-line and 12 companies reported negative sales growth.

Table: Sales and Earnings Growth of GICS Sectors

Banking & Financial Sector

FY’25 has started on a modest note, with several private banks reporting moderation in business growth. Private Banks reported broadly steady performance. Margins were largely stable to marginally weak.

  • HDFC Bank: HDFC Bank Ltd, India’s largest private sector lender, started the earnings season for the nation’s finance sector with profits that surpassed street expectations thanks to boosts from strong long and deposit growth. HDFC bank’s earnings are typically a bellwether for the performance of the financial sector. Net income increased by 35% and Interest income rose by 50% in Q1FY25 YoY.2 The lender also saw its gross non-performing assets ratio widen to 1.33%, from 1.24% in the preceding period.3
  • Axis Bank: Axis Bank reported a 4.1% jump in net profits for the first quarter, but missed street estimates due to rising cost of capital. The private lender’s net profit came in at Rs.6,034 crore for Q1FY25, compared with Rs. 5,797 crore a year prior.4 The bank’s net interest income stood at Rs. 13,448 crore for the quarter, up 12.5% from a year ago.
  • ICICI Bank: ICICI Bank Ltd reported profits that surpassed market expectations as demand for loans held strong, providing a boost for its interest income. ICICI Bank’s loans portfolio is dominated by retail loans that accounted for nearly 55% of total loans at the end of March. Deposits and loans grew by 15% with net Income increasing to Rs. 11,059 crores in Q1FY25, up from Rs. 9,650 crores a year ago.5 Net interest margin contracted to 4.36% from 4.78% the prior year.
  • State Bank of India: SBI’s first quarter profit beat street estimates thanks to higher interest income. Net income rose 1% YoY to Rs.17,040 crores in Q1FY25.6 The nation’s largest state lender also saw growth of 15.4% in gross advances from a year ago, while net interest income rose 17%.7 The firm’s ratio of non-performing assets stood at 2.21% versus 2.24% reported in the previous quarter. On a sequential basis, SBI’s numbers weren’t that encouraging. Gross advances grew by just 1%, while net-interest income slipped by 1.3%.8
  • Kotak Bank: Profit of Kotak Mahindra Bank Ltd. beat expectations after selling its stake in its insurance unit (Zurich Insurance Group AG). The company continues to work on lifting a regulatory ban on expanding its business via online platforms. Net income surged 81% to Rs. 6,250 crores in Q1FY25, compared with the same period last year.9
  • Bajaj Finance: Bajaj Finance Ltd reported a 14% increase in net profit for the June 2024 quarter, reaching Rs. 3,912 crores compared to Rs. 3,437 crores in the same quarter of 2023.10 Revenue for the NBFC stood at Rs. 16,098 crores in Q1, up from Rs. 12,497 crores in the June 2023 quarter.11 Net interest income grew by 25% in Q1FY25 along with increase in total expenses to Rs. 10,839.48 crore.12 Despite reporting a solid increase in net profit and revenue, concerns over rising credit costs and declining net interest margins have tempered enthusiasm.

Information Technology

IT Service companies reported healthy performance with median revenue growth of 1.2% QoQ constant currency (CC).13 Tier-1 players achieved a median revenue growth of 0.7% QoQ CC, while Tier-2 companies recorded a growth of 1.6% QoQ CC.14

  • Infosys: The IT services giant reported a 7% growth in net profit for their first fiscal quarter at Rs. 6,368 crores against Rs. 5,945 crores a year ago, beating market estimates.15 It also raised revenue growth forecasts for the fiscal year to 3-4% in constant currency term from the earlier 1-2%, with a pick-up in the critical financial services vertical.16 This marks the first time Infosys has raised its annual sales forecast since early 2023, reflecting growing hopes that emergent trends such as AI may help reverse a years-long slump in corporate tech spending.
  • Tata Consultancy Services Ltd: TCS reported profits that met analyst estimates, signalling corporations are slowly resuming spending on projects to take advantage of technologies such as artificial intelligence. Net income rose 9% to Rs. 12,040 crores in the Q1FY25.17 EBIT margin was 24.7%, the biggest surprise for Q1, as TCS took a hit of 170 bps due to compensation increases and higher pass-through costs.18 The compensation increase was partly offset by better productivity and higher utilisation.
  • HCL Technologies Ltd: HCL tech’s Q1 results were largely in-line with street estimates. Profits after tax were a bright spot, as they grew 20% YoY to Rs.4,260 crore, surpassing estimates thanks to the State Street divestiture.19 HCL did however, suffer a revenue dip driven by subdued performances in the IT and business services, and engineering research and development segments, which were down 1.5% and 3.5% QoQ CC, respectively.20

Oil, Gas & Consumable Fuels

Oil Marketing Companies (OMC’s) Q1FY25 earnings took a significant hit due to slower-than-expected recovery from LPGs.

  • Reliance Industries Ltd: Reliance’s profits missed analyst expectations as it grappled with low margins in a “challenging operating environment” for its energy businesses. Net income at India’s largest company fell 5.4% to Rs.15,140 crores for Q1FY25 compared with the same period last year.21 Reliance did report a 12% rise in revenue to Rs.236,000 crores, however total costs also surged 14% to Rs. 217,000 crores.22 The business was mainly impacted by lower fuel cracks with tepid global demand and ramp-up of new refineries.
  • Oil and Natural Gas Corporation of India: ONGC’s quarterly profits declined 15% YoY as higher oil prices were offset by low production and an increase in windfall tax.23 The New Delhi-based company posted a net income of Rs 8,940 in Q1FY25, in-line with street estimates. However, its gas price realisation declined 3.1% on year.24 Earnings were further hit by a 1.4% decline in oil and 4.1% fall in gas production during the quarter.

Automobile & Auto Components

Q1 FY25 results have been positive so far for the automotive sector. Revenue has been largely in-line, driven by healthy volume growth across most segments (particularly 2 wheelers), alongside a better product mix and price hikes.

  • Mahindra & Mahindra Ltd: M&M Posted a 6% YoY drop in reported profit after tax for Q1 FY25.25 Revenue for the quarter grew 10% on strong growth in general auto and farm vehicles.26 The company’s auto division also posted its highest ever Q1 volume at 212,000 units, up 14% YoY. M&M has said it is on track to expand its SUV production capacity from 49,000 units per month to 64,000 units per month by the end of FY2025.27 SUV revenue market share for M&M was up 130 basis points in Q1FY25 to 21.6%. The farming segment also looks to be improving, with M&M growing market share by 180 basis points to 44.7% in Q1FY25.
  • Maruti Suzuki Ltd: Maruti Suzuki reported a better-than-expected quarterly profit boosted by higher SUV sales. The company now plans to launch at least one electric vehicle model a year. Net income rose 47% to Rs.3,650 crores in Q1FY25 YoY. while revenue climbed 9.9% to Rs.35,530 crores, also beating estimates.28 Total costs rose 5.6% to Rs.31,820 crores, while raw material costs jumped 16% from the year ago quarter.29 Overall, the firm saw a surge in profit, driven by cost reduction efforts, favourable commodity prices and foreign exchange rates.

Fast Moving Consumer Goods

The Q1FY25 results for FMCGs have so far been in line with expectations, showing an improving consumption trend. In the staples sector, demand has been steadily increasing, with signs of growth in rural market. Harsh summer conditions and election related restrictions have affected consumption and categories such as HI, beverages, alcoholic beverages and paints while boosting demand for cooling products.

  • ITC Ltd: ITC’s net profit margin witnessed a marginal rise of 0.3% missing estimates in Q1FY25, as its paper board operations and agricultural business weighed on its profit margin.30
  • Hindustan Unilever Ltd: The company posted an underwhelming quarterly profit weighed down by muted consumer demand during India’s scorching summer season and rising inflation. The Indian unit of Unilever Plc saw net income rise 2.8% to Rs.2,540 crores for Q1FY25 compared with the same period a year ago.31

Healthcare

The Indian Pharmaceutical Industry is set for significant growth, driven by strong domestic and export market performance.

  • Sun Pharmaceutical Industries Ltd: Sun Pharma delivered better-than-expected Q1FY25 earnings, led by an improved segmental mix and lower RM costs. Lower-than-expected R&D (Research & Development) spending led to margin improvement in Q1. The performance was affected partly by a muted show in rest of the world sales. The top line increased by 5.96% and the profit increased by 40.2% YoY.32

Construction

  • Larsen & Toubro: Engineering and construction major, Larsen and Toubro (L&T), reported a consolidated net profit of Rs.2,786 crores for Q1FY25.33 The company’s revenue from operations increased 15% YoY, led by robust execution witnessed in the projects and manufacturing (P&M) portfolio on the back of a large order book. The company received orders worth Rs. 70,936 crores at the group level in the first quarter, registering YoY growth of 8%, aided by the strong ordering momentum in the Middle East.34

Telecommunication

  • Bharti Airtel Ltd: Bharti Airtel Ltd reported a larger-than-expected quarterly profit as new users, rising data consumption and one-time gains helped India’s No.2 wireless carrier bear the continuing pain in its Africa business. The firm, saw a 158% jump in net income to Rs.4,160 crores for Q1FY25 compared to same period last year.35 The latest quarterly earnings are coming on a low base since the last year’s June quarter profit was dragged down by a massive forex loss following the devaluation of the Nigerian naira.

 

Related Funds

NDIA: The Global X India Nifty 50 ETF (ASX: NDIA) invests in 50 of the largest companies listed in India.