Corporate profits surge, but Sensex earnings remain in slow lane

Shows deceleration in earnings of top-listed firms from FY22 highs

There has been a sharp rise in corporate profits in India in the last two quarters but that is yet to reflect in the earnings of the S&P BSE Sensex companies.

The benchmark’s earnings per share (EPS), which track the combined net profits of top 30 firms part of the index, are up just 7.2 per cent year-on-year (Y-o-Y) to Rs 2,826.3 as on Monday, up from Rs 2,635.7 at the end of November 2022.

This indicates that the sharp deceleration in the earnings growth of India’s top listed companies, from their highs in FY22 and FY23, continues this financial year. For comparison, the Sensex EPS was up by 32.1 per cent Y-o-Y, on average, in FY23 and 31.7 per cent Y-o-Y, on average, in FY22. Since July this year, Sensex earnings have grown between 5 per cent and 8 per cent.

The index EPS is calculated by dividing its closing value by its trailing price to earnings (P/E) multiple for the day as provided by the BSE every day.

The slowdown in the profit of the Sensex firms is in sharp contrast to strong double-digit growth in the overall corporate earnings in the last two quarters. The combined net profits of around 3,000 listed firms that have declared their results for the July-September quarter of FY24 are up 43.1 per cent Y-o-Y to an all-time high of Rs 3.26 trillion during the quarter.  Analysts attribute the dichotomy in the index’s earnings and overall corporate profits to the lopsided nature of growth in earnings in recent quarters.

“The earnings growth was (fuelled) by the domestic cyclicals, such as banks & finance (BFSI) companies and automobile makers. BFSI (banking, financial services and insurance) companies clocked a 41 per cent YoY growth in profits, while automakers registered earnings growth of 45 per cent YoY against estimates of 30 per cent, driven by Maruti Suzuki. The public sector oil marketing companies (OMCs) also reported a sharp surge in their profits in Q2FY24 compared to a net loss in Q2FY23 owing to strong marketing margins,” write Gautam Duggad, Deven Mistry, and Aanshul Agarawal of Motilal Oswal Financial Services in their interim review of Q2FY24 corporate earnings.

The three public-sector oil-marketing companies (OMCs) -- Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL), and Hindustan Petroleum Corporation (HPCL) -- have been the biggest contributors to incremental growth in corporate earnings in the second quarter of FY24.

They reported combined net profits of around Rs 27,000 crore as against a combined net loss of around Rs 3,000 crore in the year-ago quarter. As a result, these OMCs together accounted for nearly a third (31.6 per cent) of overall Y-o-Y growth in corporate earnings in Q2FY24. However, none of these OMCs is part of the Sensex.

Another non-index company, Adani Power, has been the fourth-biggest contributor to overall growth in earnings in Q2FY24 with a Rs 5,900 crore swing in its net profit on a Y-o-Y basis. It is followed by public-sector Oil and Natural Gas Corporation (ONGC), which reported a net profit swing of Rs 5,435 crore in Q2FY24 compared to Q2FY23. Together, these five companies account for 43 per cent of overall incremental growth in corporate earnings in Q2FY24.

Neither Adani Power nor ONGC is part of the Sensex.

Analysts say the Sensex’s overall earnings and its EPS are affected by the weighting of individual stocks in the index. A stock with a large weighting has a bigger influence on the index’s overall EPS and vice versa.

Currently, HDFC Bank (weighting of 14.64 per cent), Reliance Industries (10.33 per cent), and ICICI Bank (8.5 per cent) are the top three index stocks with a combined weighting of 33.5 per cent. Of these, HDFC Bank and Reliance Industries have reported relatively muted earnings growth (less than 20 per cent) in recent quarters, pulling down overall growth in the index’s EPS. Similarly, the Sensex’s earnings growth has been adversely affected by a weak performance in IT services majors such as Infosys and Tata Consultancy Services, which together have an 11 per cent weighting in the index.

In contrast, companies that topped the earnings growth chart in recent quarters, such as Bajaj Finance, Maruti Suzuki, Mahindra & Mahindra, and Tata Motors, together have just an 8 per cent weighting in the index.