Nifty Q4 profits beat expectations but quality poor; risks to FY24 earnings growth estimates rise

Kotak Institutional Equities is not-so-happy with the market narrative. The market, Kotak feels, has a ‘selective’ bias, with it liking the recovery in profitability but ignoring the continued weakness in volumes in consumption sectors in the short term and assuming a strong recovery in volumes but dismissing the likely compression in profitability in the medium term.

Rich valuations across sectors discount selective positive short- and medium-term narratives, but disregard any inconvenient negative developments, the brokerage feels.

March quarter results played up to the market’s ‘convenient’ expectations, it said.

"4QFY23 net profits and Ebitda of the Nifty index increased 19 per cent YoY (7.4 per cent above our expectation of 10.7 per cent YoY growth) and 10.6 per cent YoY (2.8 per cent above our expectation of 7.5 per cent YoY growth). However, the quality of the beat was rather poor, with one-off issues in the cases of Coal India (lower-than-expected overburden expense) and RIL (lower-than-assumed tax rate) meaningfully contributing to the positive surprise. We expect the net profits of the Nifty-50 Index to grow 12.6 per cent in FY2024 and 15.2 per cent in FY2025E," it said.

Kotak, however, is not alone. Ambit Capital too is a worried lot. It said EPS estimates in FY21-23 were resilient but trend continuation in FY24 looks difficult. Earnings trajectory will likely change from FY24, with BFSI contribution to incremental EPS growth tapering to 43 per cent.

"Our house view suggests IT, metals & O&G (Reliance Industries) contribute 20 per cent of incremental EPS growth & are at risk. While banks' EPS trajectory remains robust, risks to 'Tech earnings' remain with expectation of revenue growth normalization to pre-Covid period. Delay in China recovery can hit Reliance & Metal earnings."

Ambit Capital said its analysis suggests, even in FY21-22 year when aggregate headline earnings were met, “earnings delivery” breadth remained poor. "It’s global cyclicals earnings upgrades which delivered earnings in FY21/22. We don’t see material upgrades, additionally yield softening can put even bank NIMs at risk," it said.

While JM Financial sees limited downside risk for Nifty, it believes earnings to grow at a more realistic rate of 13 per cent-15 per cent in FY24.

"We are cognisant of the risk of adverse weather conditions, which could disrupt the demand environment, especially the rural economy," it said.

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