India Market Update: November 2024

After four consecutive years of healthy double-digit growth, corporate earnings are moderating due to pressure from commodities and fading tailwinds in the Banking & Financial Services (BFSI) sector. Recent earnings revisions have turned adverse, with downgrades exceeding upgrades. Four major sectors of Nifty 50 Index, namely BFSI, Information Technology, Consumer Staples and Energy, all reported lower than expected revenue. The earnings of these four sectors account for more than 66% weight in Nifty 50 Index.¹

As of November 4, 2024, BFSI’s earnings fell short of expectations by -11.7%. The energy sector’s earnings surprised to the downside by -27% and consumer staples missed expectations by -4%. Information Technology (IT) companies on an aggregate are reporting earnings surprise of -1%.² For CY 2024 , Q1 saw an earnings surprise of +6.76% and Q2 earnings also surprised to the upside by 2.30%. Q3 will be the first quarter reporting lower than expected. Signs of weakness in consumer demand is emerging – especially in urban areas due to persistent high level of food inflation. The downturn in urban consumption is one of the causes of lower-than-expected earnings of FMCG companies. As far as IT companies are concerned, a potential slowdown in the US economy continues to be of concern. Energy companies’ earnings were hurt due to weaker refining margins and the selling of domestic cooking gas at prices below their cost due to government fixing.

In month of October 2024, the Nifty 50 Index has fallen around 7%.³ This pull back was due to a few factors. First, foreign investors are divesting from Indian stocks at a surprisingly high pace and quantity – likely due to the perception that Indian equities have become expensive. Sentiments were further dampened by the recent weaker-than-expected Q3 earnings, as well as a pivot toward the Chinese market following government stimulus measures.

Foreign investors aside, Domestic Institutional Investors (DIIs) invested over Rs. 1 lakh crore in Indian equities in October 2024, marking their highest monthly purchasing on record. This indicates a domestic structural shift towards equities, driven by growing retail participation through mutual funds. We expect this trend to support high valuations and provide market stability despite fluctuations in Foreign Institutional Investor (FII) activity.

FIIs and DIIs have also taken contrasting positions in the Indian derivatives market over recent sessions amid rising volatility ahead of the newly introduced monthly derivative series and the US Presidential elections. While FIIs have offloaded substantial volume and increased positions in put options, DIIs have sustained their buying momentum in the cash segment, providing some stability as the market heads into November.

Despite challenges, the ongoing festivities, better-than-expected monsoon season, and consequent pick up in rural challenges, are all providing near-term bullish catalysts. Major central banks including the US Fed, have also pivoted toward a monetary easing cycle. Consequently, markets appear to be experiencing a tug-of-war between headwinds and tailwinds.

In recent times, whenever global uncertainties and market volatility prompt FIIs to sell off, domestic investors have consistently stepped in to stabilise and even drive the markets higher. This pattern of steady domestic buying supported by strong retail investment, signifies optimism on both the demand and supply sides of the domestic market.

Valuations

As of November 4, 2024, the Nifty 50 Index trades at a PE of 24.57x, which is at a premium of ~12.35% compared to its 5-year average of 21.87x. India has always traded at premium to its emerging market peers. The Indian market is currently at a slight premium over its long period average due strong domestic flows and a resilient macro landscape.

Quarterly Earnings – FY 2024-25⁴

34/50 Nifty companies have reported their earnings for September 2024. While earnings growth for the quarter have been largely flat YoY, 18 of the 34 companies that have reported surprised to the downside. The index overall is reporting an earnings surprise of -14.23% while earnings growth sat at 1.48%. In terms of sectors, BFSI, consumer staples, energy and information technology have been largest draggers for the index.

This past quarter was the first time in 2024 that the Nifty has reported negative earnings surprise. In fact, the quarter was the worst quarter since March 2023 in terms of sales and earnings surprise.

Banking & Financial Sector: Earnings growth for private banks were mixed, but public sector banks (PSBs) remained on a healthy earnings trajectory. Margins compressed for both PSBs and Private Banks, with some banks reporting double-digit percent decreases in net interest margins (NIM) QoQ.

• HDFC Bank: Net income rose 5.3% in Q3 2024. The notable highlight from the quarter was a sharp drop in the bank’s credit-to-deposit (CD) ratio, which fell to 99.8%. This marked the first time the ratio has dropped below 100% since the merger with mortgage giant HDFC in July 2023. HDFC Bank’s key financial metrics showed solid growth, with 6% YoY rise in September 2024 quarter net profit, while net interest income grew by 10% YoY. The company’s NIM also stood at 3.46%, in line with Street estimates. The bank’s asset quality deteriorated, with gross non-performing assets (NPAs) at 0.41% compared to 0.39% in Q1FY25.
• ICICI Bank: ICICI Bank’s net profit jumped 14.5% YoY and NIM gained 9.5%. While net profit beat estimates, net interest income fell short of street expectations. NIM fell by 9bps QoQ to 4.27% as mix change led to lower yields and overall funding costs rose. Headline asset quality improved marginally with slippages down QoQ to Rs. 50.7 billion or 1.6% of loans. Headline NPAs in the retail segment were lower QoQ. ICICI Bank has been improving filters and sourcing for unsecured loans and remains cautious in its outlook.
• Axis Bank: Axis Bank reported an 18% rise in net profit, coming in at 69 billion crores on the back of strong trading income and low operating expenses. Net interest income grew 9% YoY to 134 billion crores. Net interest margins for the quarter eased to 3.99% against 4.11% a year ago. While the bank had a decent quarter, growth concerns remain on the horizon. The PAT beat was driven by tax write-backs and treasury gains. Weaker retail loans and higher contingent provisions led to Axis Bank’s overall provisions nearly trebling to Rs. 2,204 cores from Rs. 815 crore a year ago.
• Kotak Mahindra Bank: The bank reported a lower-than-expected 5% increase in profit at 33 billion rupees, affected by higher loan provisions and shrinking lending margins. Provisions and contingencies, which are funds allocated for potential bad loans, surged nearly 80% to 6 billion rupees during the quarter. Net interest income met expectations at 70 billion rupees and represented an 11.5% YoY increase. However, the NIM declined to 11bps QoQ to 4.9% due to a reduced share of high-yielding unsecured loans, impact from regulatory constraints and other increased slippages.

Information Technology: IT Services companies reported healthy performance, with median revenue growths of 2.0% QoQ CC (constant currency). While these results are encouraging, company provided outlooks remain slightly cautious.

• Infosys: Infosys trailed analyst estimates as its consolidated net profit rose just 4.73% to 65 billion rupees against projections of 67 billion rupees. The company also reported a 5.1% growth in revenue to 409 billion rupees. On the positive side, Infosys upped its the revenue guidance for the full year. The upward revision was mainly attributed to the ramp-up of mega deals. Previously the company had provided a revenue growth guidance of 3-4% for FY25. The company’s revenue for the quarter increased by 3.3% YoY CC and 3.1% QoQ. However, operating margins experienced a slight decline of 0.1% YoY and remained flat QoQ.
• Wipro: The company reported a mixed performance for the quarter. Revenue decreased by 0.95% YoY, however profits increased by a surprising 21.26% YoY. On a sequential basis, Wipro’s revenue experienced a growth of 1.54%, while profits rose of 6.85%. This indicates there may be a recovery trend in profitability despite the overall revenue dip. The company noted a reduction in selling, general and administrative expenses which has contributed positively to their operating income.
• Tata Consultancy Services: India’s leading software exporter reported a growth of 5% in net profit, reaching 119 billion rupees. However, the result was lower than the 124 billion rupees the market had expected. Constant currency, the company grew revenues 5% YoY, however operating margin declined 0.2% YoY. Growth during the quarter was mostly led by energy, resources, utilities, and manufacturing. BFSI, consumer and life science rose by a marginal 0.1% each while tech and media services declined.
• HCL Technologies Ltd: HCL Tech’s software segment grew 9.4% YoY- the strongest ever yearly growth ever. However, the firm reported a 0.5% QoQ decline in net profit. Better-than-expected performance in the first half of fiscal 2025 also gave confidence to the firm to increase the lower end of its forward guidance. HCL Tech revised its annual revenue growth guidance from its earlier range of 3-5% to 3.5-5%. The company mentioned better incremental demand across multiple verticals, and reported a revenue of 288 billion rupees, which is up 2.9% QoQ and 6.7% YoY.

Telecommunication: Markets expected it to be a strong quarter for telecommunication firms on account of the flow-through effects of the recent tariff hikes.

• Bharti Airtel Ltd: Bharti Airtel’s profit grew 168% YoY to 35.9 billion rupees as opposed to 13 billion rupees in the same quarter a year ago. This spike in profit was due to the higher telecom tariffs imposed in early July 2024. Despite the immense growth, the reported profit still fell short of the 43.9 billion rupees analysts had estimated. The operator took a one-time expense of 8.54 billion rupees for the quarter on account of net foreign exchange loss due to currency devaluation in group units. Revenue rose 12% to 414.7 billion rupees, which beat estimates slightly. Average revenue per user (ARPU) for Indian operations was 233 rupees, a jump of 10% from the previous quarter. However, still a far cry from the 300-rupees mark that Bharti has been flagging for a while as the minimum needed for financial stability of the telecom operators.

Oil, Gas & Consumable Fuels: Oil & Gas companies have so far reported weak results.

• Reliance Industries Ltd: Reliance reported a 3% drop in quarterly profit, hurt by weak refining margins. Profit stood at 193.2 billion rupees, in line with street estimates. Revenue was stable, benefiting from the strength of the oil-to-chemicals (O2C) pipeline, the overall oil & gas businesses, as well as its fast-growing digital services (Jio) businesses. Operating profit, a yardstick for underlying business performance, fell 3.1% to 418 billion rupees. Operating profit of the O2C business decreased 24% to 124 billion rupees due to sharp decline in product margins. Fuel cracks declined nearly 50% as did petrochemicals due to muted global demand in a well-supplied market.
• Bharat Petroleum Corporation Ltd: BPCL reported a 72% drop in its net profit for the quarter ending September 2024, impacted largely by higher expenses and weak refining margins. BPCLs’ consolidated net profit stood at 229 billion rupees down from 824 billion rupees. The OMCs revenue was nearly flat at 1.02 trillion rupees missing analyst estimates of 1.07 trillion rupees

Automobile & Auto Components: Auto sector results were generally aligned with expectations, mainly driven by domestic growth in 2-wheeler demand and a recovery in exports.

• Mahindra & Mahindra Ltd: M&M reported a significant increase in profitability. The company’s topline grew by 16.48% YoY, while profit surged by 38.54% compared to the same quarter last year. Despite the YoY growth, the company experienced a dip in its performance QoQ. Revenue rose by 3.47% QoQ, however profit saw a notable decline of 21.75% QoQ. The company’s operating income was similarly mixed, down 18% from the previous quarter yet up an impressive 45.91% YoY.
• Maruti Suzuki India Ltd: The company revealed a modest increase in revenue by 0.29% YoY, while profit saw a significant decrease of 18.05% YoY. QoQ, revenues grew by 4.67%, yet profit experienced a drop of 17.48%. Operating income also took a hit, down by 4.29% on a quarterly basis and 9.12% YoY, reflecting ongoing pressures in the automotive sector.

Construction:

• Larsen & Toubro Ltd: L&T’s quarterly results showcased a significant increase in topline growth. Revenues grew by 20.64% YoY, while profits increased by 5.36% YoY. On a QoQ basis, revenue grew by 11.67%, while profit surged by 21.88%. The company’s selling, general and administrative expenses saw a slight rise of 2.03% QoQ and 9.76% YoY. Despite the rise in expenses, operating income rose 15.61% QoQ and 13.05% YoY, reflecting the company’s effective cost management and operational efficiency.

Fast Moving Consumer Goods: Results so far have been slightly lower than expected. Demand was subdued for the urban market, while rural growth contributed positively to overall growth.

• ITC Ltd: ITC’s reported a net profit of 50.7 billion rupees, a 3% rise YoY. Despite the profit growth, ITC’s operating margin came under pressure, hitting its lowest level in nearly three years. The company’s operating margin contracted by 470 bps to 32.8%, missing analysts’ expectations by approx. 4%. This margin decline is the lowest recorded since Q2 of the FY2022 when it stood at 32.5%.
• Hindustan Unilever Ltd: The company posted net income of 26.1 billion rupees last quarter, down 4% from a year ago. That fell short of the analysts’ estimates of 27.06 billion rupees. The profit miss came amid a downturn in sales of everything from snacks and coffee to cars in India. The company is now betting on demand in India’s rural areas outpacing urban centers to help support sales. Rural incomes are expected to have improved on the back of a moderate monsoon season over the past few months.

Healthcare: Earnings growth for pharma companies remained healthy. The domestic formulation business witnessed ~11% YoY growth for companies.

• Sun Pharmaceutical Industries Ltd: Sun Pharma reported net income 27.98% for the quarter, better than analyst estimates, driven by marginally lower research & development costs. India’s largest drug maker’s revenues were bolstered by sales of its global specialty medicines segment, which grew over 19% YoY to $286 million in the quarter. Sun Pharma also revised its annual R&D spending guidance to 6-8% of sales, against 8-10% provided at the start of the year, as it continues to face delays in clinical trials.

Related Funds

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