- #MOSL on Q3 earnings: Hits and misses
- What worked for financials and autos in Q3?
Tamanna Inamdar in conversation with #MotilalOswal Institutional Equities' Head - Research Gautam Duggad.
- What worked for financials and autos in Q3?
Tamanna Inamdar in conversation with #MotilalOswal Institutional Equities' Head - Research Gautam Duggad.
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TVTranscript
00:00 It's a wrap on Q3 results season and who better to break down the good, the bad and the ugly
00:19 of how corporate India has turned out in quarter 3 than Gautam Duggal, Head of Research, Motilal
00:25 Oswal, Institutional Equities. His quarterly report in fact is one that the market watches
00:30 very keenly. Gautam, hi, great to have you on NDTV Profit. You know, this was an important
00:37 quarter because it was in a sense the quarter of reckoning after the kind of run up and
00:43 slightly insane run up we saw towards the end of calendar year 23. Then the question
00:49 became that have these companies really performed and that's what Q3 was all about. In that
00:56 context how many companies do you think have stood that test? Hi, good morning, thanks
01:03 for having me here. Yes, you put it quite correctly that markets has had a fabulous
01:08 run and therefore corporate earnings to that extent becomes a very important driver and
01:16 indicator to track. I think this quarter has gone off quite well aggregate basis. If I
01:21 look at a very top down view for the 250 odd companies for which we predicted earnings
01:26 in our coverage intervals, we were predicting an earnings growth of 19%, we got 29%. So
01:34 a decent beat. For Nifty, we were predicting about 10% earnings growth and we got 17%.
01:42 More importantly, a lot of sectors have contributed, you know, auto, which has beaten expectations
01:48 big time, PSU banks, they've also beaten expectations, cement, even private banks at about 20% plus
01:55 earnings growth have met our expectations. Metals and oil and gas have been a big driver.
02:01 Obviously, metals on a very low base and given the nature of the sector, the beat was quite
02:06 humongous. We were expecting 20% kind of a growth in metals, we saw 17% plus. Even the
02:12 oil and gas led by OMCs have had a very strong quarter. The only weak point that I see in
02:20 the quarterly earnings was consumer, more so on the staple side and the low ticket consumption
02:25 item, which is going through a period of lull. So top line growth was very muted, even though
02:30 earnings overall at about 14% profit growth was better than our expectations. And then
02:35 of course tech. While expectations were muted, and those muted expectations were met, the
02:42 commentary still doesn't point towards any big revival in the offing in tech. I forgot
02:47 to mention even pharma earnings were quite strong and we've seen earnings upgrading pharma.
02:51 So all in all, a pretty good earnings season. We are well on track to deliver 20% earnings
02:56 growth for FY24/15. We had started with an EPS of 975 for the quarter, for FY24. When
03:04 we ended the quarter, we are still at 976. So that basically means 20% earnings growth
03:09 for FY24. And we are at about 1140 rupees for FY25 and 15 years, which basically converts
03:16 to about 15-16% growth. So if that happens, we've already seen a 22% earnings compounding
03:21 from 15 the last four years, between FY20 and 24. And next two years, 24 to 26 also
03:28 is looking quite decent at about 15-16%. So corporate earnings are quite resilient and
03:33 completes the very strong macro and micro picture beautifully.
03:39 Yeah. And you know, also underlines that despite valuations that have run up, there is a solid
03:46 reason to bet on the growth of these companies. But you talked about metals being outperformers.
03:51 I think auto has also done very well and surprised on the upside this quarter. What about your
03:56 public sector companies? And I come to that because the kind of run up we saw, and it's
04:01 a wide basket, so we'll get into the details, but railway stocks, solar energy, power, defence,
04:09 all of these, a lot of companies running up because they're owned by the government and
04:15 were seen to benefit from the kind of capex push that policy-wise has been coming in.
04:21 The question is that on margins, on deliverables, on speed, on efficiency, did they really pass
04:27 the test?
04:28 So, Tawana, before you look at the PSU, you also look at what happened in the previous
04:33 10 years. If you look at the BSE-PSU index in CY12 and CY21, they were virtually flattish.
04:41 The PSU as a pack, the earnings, I remember we had put out a note in December 22 when
04:46 we analysed the decadal performance of PSU companies, both earnings, market cap, broke
04:52 it into two halves and all of that. The earnings were also very lacklustre. Now, between December
04:58 22 and now, the PSU index has done fabulously well.
05:03 Large part of the incremental push on earnings as was fundamental to concerns come from PSU
05:08 banks. PSU banks were making losses to FY18. After that, they started improving, and now
05:13 they are at such a scale that they're doing phenomenal profit numbers with 20% ROEs. Who
05:20 would have imagined SBI will do 20% ROE? Four years back, if it had asked and taken a poll,
05:26 not many people would have said that. PSU banks have been a blockbuster set of earnings
05:32 once again. In fact, this is the first quarter where I have seen that PSU banks have outperformed
05:37 private banks on earnings as well. We have seen upgrades in earnings for PSU banks, while
05:42 marginal downgrade in private sector banks.
05:45 PSU banks aside, the other element of the PSU's basket, things like OMCs, oil and gas
05:53 companies like Gale and some of the mining names like Coal India, NMDC, they posted very
05:59 solid set of numbers. Yes, on railways, some of the defense name, there was some disappointment
06:06 in earnings concern, which is why you've seen a very quick market reaction coming in there
06:11 as well. Unfortunately, we don't cover that segment yet, especially railways and defense.
06:16 I'll restrict my comments on what we cover, which is metals, oil and gas, and PSU banks.
06:21 In fact, in our own model portfolio, we had increased the rate of some of the PSU names.
06:26 We've been having a significant overweight on PSU banks since 2022. In fact, we are underweight
06:31 on private banks for more than a year now, and we have almost a 400 basis point of an
06:36 overweight on PSU banks, which we continue. Because even after such a significant run
06:40 up, the PSU banks are still trading at about 0.9 to 1.1, 1.2 times price to book, when
06:47 the ROEs are doing about 17%, 18% consistently for last year, this year. Our expectation
06:53 is these ROEs can sustain for the next two years. Yes, the PSU index has done phenomenally
06:58 well. One element responsible for that is also underlying corporate earnings. Second,
07:04 obviously, the expectations of political continuity, and therefore, the hope that the policy momentum
07:11 will continue to remain intact. The way the government has prioritized CapEx in the last
07:18 four years, where we've seen the budgeted CapEx going up from 2.5 trillion, five years
07:23 back to almost 11 trillion now, I think that push, the fact that political continuity,
07:30 that perception is getting bolstered, that all goes quite well. Yes, some of the stocks,
07:35 obviously, are looking overheated, given where they were trading at one year back, and where
07:40 they are. So, there will be a disappointment if the earnings don't follow pace.
07:44 Top lemons. Gautam, let's be specific. What would be the top lemons in terms of overheated
07:51 stock runs that have not actually proven their point or lived up to those expectations in
07:58 terms of quarterly numbers in Q3? What would be your top five lemons? And let me expand
08:03 it beyond PSUs.
08:04 Yeah, no. So, in so far as PSUs, as I said, for the sectors that we cover in PSUs, which
08:10 is PSU banks, oil and gas, metals and mining, numbers were quite well, which is why we still
08:16 have Gain, Poll India, HPCL in our model portfolio, SBI and Bob, I mentioned. Sectors which I
08:22 said disappointed are consumer staples. So, they will take a lot of time to recover, in
08:27 my view. While stock prices may not correct much, but the underlying earnings will take
08:31 some time to recover because the volumes have not seen a recovery. Rural is still going
08:36 through a period of lull. And not just staples, I think even within consumer discretionary,
08:41 some of the lower ticket mass items are struggling, while jewelry, hotels, things like Trent and
08:48 all, they're doing phenomenally well. But it's a very K-shift. I mean, it's a very overabuse
08:54 term I know, but that's the underlying reality that there are two different sets of consumers
08:58 out there in the economy, one which is struggling and other which is flourishing.
09:02 Correct. No, that's, I mean, you're right, K-shift is overused, but it is what we're
09:07 seeing. Another important or interesting factor that caught my eye in your report, Gautam,
09:11 is your earnings upgrade downgrade ratio of 0.6 times, which you say is the worst since
09:18 Q3 FY22. And let me just break that down. So, 58 companies saw upgrades by more than
09:24 3% and 84 companies were downgraded by more than 3%. Now, even in that rubric, and that
09:30 overview that you've given that Q3 was largely a good quarter, how do you see this factor?
09:36 So this is clear reflection of the weakening of earnings trend in some of the broader market
09:42 segments. While you, when you look at Nifty, you don't get this picture, because Nifty
09:46 earnings are quite stable, we're still talking about 20% growth, forward earnings revision
09:51 is quite stable. But in the broader markets, non-Nifty coverage that we track, there have
09:56 been some disappointments, which is also what is reflected in the forward market revisions,
10:02 forward earnings revision in this segment of the stocks. So this earnings upgrade to
10:06 downgrade ratio being weakest since Q3 FY22 is clearly a reflection of that fact. Also,
10:12 you need to remember, Tamanna, now that we are entering FY25, it will be lapping up on
10:17 a high base of margins. Do remember FY23, all margins had collapsed, because commodity
10:22 costs had spiralled up post Russia-Ukraine. We had posted a decade-low gross and EBITDA
10:28 margins in FY23. Now, FY24 has been a phoenix-like recovery in margins from those absolute bottom
10:35 lows, and thus FY25, the job becomes that much more difficult, which is what some element
10:41 of reality is sinking in, some of the mid and small-cap stocks, where we have seen a
10:45 very weak kind of earnings revision on a forward basis.
10:49 [Music]