India Market Update: September 2024

The Nifty 50 Index managed to reach an all time high of 25,268 in the month of August 2024 despite high volatility in the global markets. This bull run for the Indian equity market has been supported by heavy interest from the domestic institutional and retail investors. Foreign institutional investors also bought shares worth Rs. 117 billion in the month.

The Nifty 50 delivered 4% year-on-year (YoY) profit after tax (PAT) growth in the April-June quarter of fiscal 2024-25 (Q1FY25), slightly higher than analyst estimates of 3%. In terms of EBITDA, Nifty 50 reported single digit growth of 5%, the lowest in about four years. Consensus EPS downgrades were also more prevalent than upgrades for FY25 and FY26. For FY25, 27 of the Nifty’s 50 companies downgraded forecasts – Oil, Gas, FMCG, IT, Industrials, Power and Cement were the sectors that bore the brunt of the damage.

The overall growth in the first quarter of the current financial year was primarily propelled by domestic cyclicals. The most notable contributions were witnessed from the healthcare, real estate, capital goods and metal sectors. Five Nifty companies namely – HDFC Bank, Tata Motors, ICICI Bank, Maruti Suzuki and TCS – contributed 127% of the incremental YoY accretion in earnings. On the other hand, the index’s aggregate performance was dragged by oil marketing companies (OMCs). BPCL, JSW Steel, ONGC, Reliance Industries and Grasim Industries all negatively affected the Nifty earnings. 37 companies within Nifty reported earnings beats, whereas 13 companies reported below estimated earnings growth. In terms of sales growth, 42 companies reported positive sales growth, while 2 reported in-line estimates and 6 companies reported negative sales growth.

As of September 5, 2024, the valuations of the Nifty 50 Index sits at 22.97x, which represents a rough premium of ~6.84% compared to its 5-year average of 21.50x. India enjoys this premium valuation firstly due to Nifty PAT, which has compounded by 25% over the last 3 years, and secondly, India has a strong, continuous and stable political setup which promotes growth. Moreover, India’s GDP growth rate, which ranges between 6-7%, combined with a healthy macroeconomic condition, stable currency, twin deficits under control, domestic institutional inflows, moderating inflation print, and massive development of digital and physical infrastructure, all support the premium valuation.

Sectoral Updates

Banking & Financial Services

Banking and Financial services have shown strong earnings growth, particularly among private-sector banks. These institutions have benefited from robust credit growth, improving asset quality and better net interest margins (NIMs). The insurance industry stands out, having rebounded from regulatory setbacks related to taxation. With growing penetration and stable profitability, challenges persist with sluggish deposit momentum exerting pressure on NIMs and signs of moderation in unsecured loans.

Information Technology

IT Service companies reported healthy performance in Q1, beating estimates with median revenue growth of 1.2% QoQ on constant currency (CC) basis. 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. With mild recovery in discretionary spending among Banking Financial Services and Insurance (BFSI) clients, the focus has now been on high-quality transformation deals rather than cost-takeout deals in niche markets, but the overarching pressure on discretionary spending persists. Among other sectors, weakness also remains. The communications sector, in particular, have seen clients face the impact of significant capex under high interest rates. Within Hi-Tech, spending continues to shift towards hardware and semiconductors, companies are expected to record these product engineering software expenditures in the near future. The next likely catalyst for the sector could be US rate cuts which could stimulate spending and aid recovery to revive the tech spending across major sectors.

Fast Moving Consumer Goods (FMCG)

Although this sector has underperformed in recent years due to a sluggish post-COVID recovery and weak rural demand, the long anticipated recovery in rural consumption is starting to appear as inflation eases and interest rates decline. This trend of recovery is expected to push discretionary spending from 25-30 percent to 40 percent of the consumption basket within the next five years, offering significant opportunities in retail, consumer durables, apparel and quick service restaurants.

Pharmaceuticals

Earnings growth of ~28% YoY marginally exceeded analyst projections, but performance varied across the sector. The US-facing generics business remains the primary growth driver, even as CDMO (contract development and manufacturing organization) companies face persistent challenges. On the flip side, major hospital chains showed signs of growth deceleration and margin pressure. Overall, this sector is typically less affected by economic cycles and continues to benefit from strong global and domestic demand.

Industrial and Capital Goods

Companies in this sector are likely to witness strong traction in areas such as renewable energy, data centres, real estate and defence. Margin performance for EPC (Engineering, procurement and construction) players is expected to tick-up in the 2nd half of FY25 as new orders booked at favourable prices start to come up from execution, while input costs remain benign. Availability of labour is a key point to monitor going forward as some EPC players have reported lower-than-expected domestic execution owing to the shortage of skilled and semi-skilled labour.

Oil & Gas

Multiple major OMC expansion projects are set to wrap up over the next two years, setting the stage for sustainable growth. CGD (City Gas Distribution) firms are also optimistic about robust volume growth and margins, given spot LNG (Liquefied Natural Gas) prices are anticipated to stay stable in the mid-term. Additionally, gas utility entities are anticipating continued strong transmission volumes.

Telecommunications

The Indian telecom sector registered revenue and EBITDA growth of 1.5% and 1.8% QoQ respectively in the first quarter of FY25, primarily led by a 0.7% increase in subscribers. Reliance JIO and Bharti Airtel continued to gain market share, securing the lion’s share of new subscribers. Financially, companies remained focused on deleveraging their balance sheets. Capex is expected to moderate in FY25 for Bharti Airtel and Reliance JIO, while VIL’s (Vodafone) capex is likely to remain around INR 500-550 billion over the three years to support network upgrades.

Automobile

Management teams have noted that a relatively normal monsoon and the upcoming festive season are expected to boost auto volume growth following a subdued first quarter. The two-vehicle segment is anticipated to outperform other segments. However, most ancillary companies with overseas exposures have reported a weak demand environment for autos, but there are signs of improvement in non-auto sectors. Ancillaries that have outpaced industry growth have largely done so through increased content and new order wins. However, due to cost inflation, some of these companies now expect a decline in gross margins in the coming quarter.

Stock Specific Updates

Bharti Airtel

Bharti Airtel, with a subscriber base of 355 million and an average revenue per user (ARPU) of Rs. 211, has continued its strategy of focussing on quality customers, prioritising prepaid to postpaid conversion, as well as rural expansion, and growth in B2B (business to business) segments.¹ The company is expected to benefit from recent tariff hikes in the prepaid segment and postpaid plans, providing tailwinds to its numbers in the second half of FY25.

IndusInd Bank

IndusInd Bank is expected to outpace the system with loan growth rate of 16-17% over FY24-26E, while maintaining best-in-class net interest margins (NIMs) at 4.3-44 percent. IndusInd Bank has attractive valuations despite concerns over lower liability growth and buffer provision.²

Mahindra & Mahindra

M&M is well positioned to capitalise on the growing demand for utility vehicles (UVs) with the launch of new models and recent capacity expansions. The company projects an overall automobile volume growth of 12.6% CAGR from FY24-26E, with a PAT CAGR of 22.1% over the same period.³

Reliance Industries

The company’s board of directors is expected to announce the issue of bonus shares at a 1:1 ratio, marking Reliance’s sixth bonus shares and the first share issuance since 2017.⁴ The traditional petrochemical business of Reliance Industries has been growing stronger and stronger. Falling oil prices are also expected to benefit the company’s margin as it would benefit directly from improved GRM (Gross refining margins). On another note, the company has forayed into the green business, and its other ventures, like Reliance JIO and Reliance Retail, have also started to contribute significantly to its balance sheet.

Related Funds

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