“Valuations for Nifty at 18.5x one year forward are reasonable in the context of long period averages,” Gautam Duggad, Head of Research at Motilal Oswal Institutional Equities says in an interview with Moneycontrol.

He expects 16-17 percent earnings compounding over FY23-25 and believes that the market should also reflect the underlying earnings growth as it has been doing already.

On the domestic cyclicals, he expects auto, NBFC, banks, hotels, real estate and cement sectors to report strong growth in coming quarters.

Gautam Duggad with over 14 years of experience in fundamental equity research says the recent sharp price action in the pharma sector does reflect the earnings buoyancy to a considerable extent. That said, he believes there are still enough bottoms-up stock-specific opportunities available in the sector.

Q: How do you sum up the corporate earnings season (April-June quarter FY24)?

First-quarter corporate earnings of FY24 remained strong and were in line with our estimates. MOFSL Coverage Universe recorded the highest earnings growth in the last eight quarters, fueled by domestic cyclicals, such as BFSI and Auto. The aggregate sales, EBITDA and PAT for the MOFSL universe grew at 3 percent, 28 percent, and 52 percent YoY (versus estimates +0 percent, 28 percent, and 49 percent); whereas, for Nifty constituents, grew at 5 percent, 22 percent, and 32 percent YoY (versus estimates 3 percent, 18 percent, and 25 percent).

Excluding Financials, profit for Nifty constituents rose 22 percent YoY (estimates at +17 percent) in Q1FY24.

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Q. Which major elements do you see exerting the most significant impact on the sector’s corporate earnings?

Financials and auto drove the earnings for the quarter as expected. Financials recorded a 60 percent YoY profit growth while Auto posted a 14x jump in profit to Rs 17,900 crore in Q1FY24 (versus a profit of Rs 1,300 crore only in Q1FY23) led by Tata Motors.

Oil marketing companies (OMCs) profitability surged to Rs 30,500 crore in Q1FY24 versus a loss of Rs 18,500 crore in Q1FY23 due to strong marketing margins.

Our Consumer universe delivered an in-line 19 percent profit growth. Healthcare has recovered sharply and posted 24 percent earnings growth versus flattish earnings in previous six quarters. The metals sector continued to drag the aggregates with a 40 percent YoY decline in earnings. Cement and Speciality Chemicals also posted YoY earnings decline.

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Q: Considering the rally in pharma space, do you think the sector has priced in positive earnings growth? Do you expect the rally to continue in the space?

MOSL Pharma coverage universe’ earnings growth has made a strong comeback after six quarters of flattish earnings. Significant decrease in intensity of price erosion, heightened momentum in higher-margin niche products and successful mitigation of cost pressures led to EBITDA/PAT beating our estimates.

Earnings for the quarter were up 24 percent YoY (versus our expectations of 13 percent). US sales delivered robust 27 percent YoY (in constant currency terms) growth and is at multi-quarter high.

However, the recent sharp price action in the sector does reflect the earnings buoyancy to a considerable extent. That said, we believe there are still enough bottoms-up stock specific opportunities available in the sector.

Q: What are the key reasons behind increase in Nifty EPS estimates for FY24?

Higher freefloat factor of HDFC Bank post the merger was one of the reasons for the increase in Nifty EPS. Also, some heavyweights like Tata Motors, JSW Steel, Bharti Airtel, SBI, and Kotak Mahindra Bank saw earnings upgrade post 1QFY24 earnings.

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Q: Do you think the market has already priced in the expected earnings growth of FY24-FY25?

No, we don’t think. Valuations for Nifty at 18.5x one year forward are reasonable in the context of long period averages. We expect 16-17 percent earnings compounding over FY23-25 and believe that market should also reflect the underlying earnings growth as it has been doing already. E.g. FY20-23 Nifty profits compounded at 22 percent while Nifty gave 27 percent compounding.

Q: Do you expect domestic cyclicals to report strong earnings growth in coming quarters too?

Yes, we do. We expect Auto, NBFC, Banks, Hotels, Real Estate and Cement sectors to report strong growth in coming quarters.

Q: Your take on the earnings upgrade to downgrade ratio…

The beat-miss ratio for the MOFSL Universe was largely balanced as 36 percent of the companies beat our estimates, while 38 percent missed estimates at the PAT level. However, the earnings upgrade to downgrade ratio has also been a bit unfavorable for FY24E. Also, of the 21 sectors under our Coverage, 15 sectors reported profits above or in-line our estimates.

Q: What kind of insights and developments are you anticipating to emerge from the 19th Motilal Oswal’s Annual Global Investor Conference scheduled for this week?

As always, we are hosting a large spectrum of speakers at our CEO Track for the 19th MOSL AGIC. These speakers represent various facets of the economy – Manufacturing, Financial Services, Infrastructure, Healthcare and Technology. We expect to learn lot of specific insights on the forthcoming growth opportunities in these respective domains and how India is positioned to capitalize the same. We expect Investors attending our conference to richly benefit from the same.

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