Can the June 2024 quarter corporate earnings disappoint markets?

Markets are now eyeing the upcoming budget proposals and the corporate earnings for the June 2024 quarter – the first quarter of the current fiscal 2024-25 (Q1-FY25) – to chart their course over the next few weeks. 

As India Inc prepares to unveil its financial and operational performance for the quarter gone by, some analysts remain cautious and expect the corporate earnings growth for the period under review to take the street by surprise.

Those at Bernstein, for instance, believe that the earnings growth has not kept up with the sharp rally in the markets that saw the S&P BSE Sensex scale the 80,000 mark earlier this week, up over 10 per cent thus far in calendar year 2024 (CY24). 

A visible disconnect, they said, appears when the sector earnings revision is seen against the price movements. Only 39 per cent of the NSE200 universe has seen earnings upgrades in the last three months, but 77 per cent have seen positive price movements. 

"Sectors with decent earnings upgrades show a disproportionately high movement in their stock prices - suggesting an optimistic overpricing. This disconnect is easily above 30 per cent for most sectors. With no FY25 earnings upgrades in the last three months, even IT has seen 50 per cent of stocks showing a positive return," wrote Venugopal Garre, managing director at Bernstein in a recent coauthored note with Nikhil Arela.

Disconnect between earnings growth and stock prices, Bernstein said, is even more visible in the small-and mid-cap (SMID) universe. With returns nearing 21 per cent this year and 19 per cent over the last three months in the SMID universe, the earnings expectations have come down, Bernstein said, further inflating the valuations.

“A stark difference is seen in the top 100 and bottom 100 of our NSE200 stocks, with FY25 earnings of the top 100 almost flat at around 1 per cent while the bottom 100 declined by 2.6 per cent over April & May. This has led to nearly half the midcap 150 stocks trading at a one-year forward PE of 40x or more. For large caps, this number is at 41 per cent,” Garre wrote.

At the bourses, meanwhile, SMID stocks have seen a good run this far in CY24. Waaree Renewable Technologies, Shakti Pumps (India), Cochin Shipyard, Transformers & Rectifiers (India), Moschip Technologies, Puravankara and GTL Infrastructure have rallied up to 400 per cent during this period.

Meanwhile, analysts at Motilal Oswal Financial Services, have penciled in around 13 per cent YoY profit growth for FY25. They expect this earnings growth to be driven by BFSI, Oil & Gas, Metals and Technology, which are likely to contribute 75 per cent to the incremental earnings of Nifty 50.

The overall market outlook, said Milind Muchhala, Executive Director, Julius Baer India, continues to be constructive, although there could be some phases of consolidation as the earnings catch up with the valuations, which are at slight premium to the historical averages.

Post the budget in July, the market's focus, Muchhala believes, will shift back to overall macros and earnings, along with overall valuations, although global factors such as geopolitical scenario and developments at US Fed can continue to add some volatility.

"The outlook on earnings growth continues to remain constructive, with the headline index companies expected to deliver a CAGR of around 13-14 per cent over the next couple of years. A constructive economic outlook coupled with increasing focus on domestic manufacturing is likely to provide strong growth opportunities to good businesses across sectors," he said.