Q3 Earnings – How Are Indian Companies Performing? What To Expect From Different Sectors

The December quarter earnings for Indian corporates are already coming out with a few mixed results for certain sectors but are largely anticipated to be stable, with no significant negative surprises expected, despite potential sequential declines in certain sectors. First half of FY24 demonstrated robust performance, with nearly 18% growth in profit after tax, which limits the downside risks for FY24 earnings. Some brokerages are expecting a 10% year-on-year growth in Nifty’s earnings for Q3FY24. In today’s article let’s look at the Q3 earnings for specific sectors & how they may pan out over the next few weeks.

Indian IT Sector: Q3 Recovery With Strong Operational Efficiency

Indian IT sector seems to be emerging from a period of significant challenges, including economic slowdown and geopolitical tensions. The potential stabilization of inflation and monetary policies might favor tech stocks. Moreover, tech companies are adapting through cost optimizations and efficiency improvements, while the demand for cloud computing, AI, and digital transformation services continues to drive growth.

Financial results of TCS, Infosys, Wipro, and HCL Technologies reveal resilience amidst global economic challenges. TCS and Infosys, in particular, have shown strong operational efficiency. Wipro and HCL Technologies indicate varying degrees of impact, focusing on profitability and adapting to current market conditions. The results suggest these companies are navigating through global headwinds by focusing on operational efficiencies and high-growth areas.

Management of IT companies have provided insights into their strategies, focusing on digital transformation, cloud services, and automation. They have also highlighted sustained demand for IT services despite the macroeconomic uncertainties. However, their cautious outlook suggests a balanced mix of opportunities and risks. The market’s positive reaction to these muted earnings suggests strong recovery expectations for the IT sector, making it potentially a valuable addition to investment portfolios, especially considering the long-term growth prospects.

Indian Telecom Sector: Q3 Revenue Growth Amid 5G Costs

The Indian telecom sector is expected to see revenue growth, driven by increased subscribers and network expansion. However, the growth in margins for Q3 will be limited due to the costs associated with the rollout of 5G services. Jio and Airtel are expected to see a reduction in capital expenditure on 5G by the end of this fiscal year, which should help improve their margins. Post-general elections, telecom companies are expected to increase tariffs by 15-20%, with Airtel likely to lead this hike. Here are analyst expectations for major companies in the Telecom sector:

Bharti Airtel Q3 Earnings Expectation

• Projected to experience a 3.5% sequential revenue increase to Rs 38,338 crore, with margins remaining stable at 52%. The company’s net profit is expected to grow by 36% to Rs 2,854 crore.
• Airtel Africa may face challenges due to African currency devaluation, but has healthy underlying constant currency growth.
• Airtel spent over Rs 7,700 crore on capital expenditure in the second quarter.

Vodafone Idea Q3 Earnings Expectation

• Expected to report a 2% revenue increase to Rs 10,957 crore. Its margin is expected to decrease to 38.6% from 39.9% in the previous quarter.
• Net loss for the October-December quarter is predicted to lessen to Rs 7,287 crore from Rs 8,737.9 crore in the second quarter.

JIO (Reliance Industries) Q3 Earnings Expectation

• 4.1% increase in revenue and a 7.1% rise in EBITDA to Rs 25,760 crore and Rs 13,860 crore, respectively. Average revenue per user of Rs 184.9, a 2% increase quarter-over-quarter, and a subscriber addition of 96 lakh in Q2.
• Reliance Jio’s subscriber growth is set to be strong with an estimated addition of 1 crore net subscribers. However, ARPU growth might be limited due to 5G users opting for unlimited data plans.
• Reliance has invested over Rs 38,000 crore, mainly for 5G rollout.

Indian FMCG Sector: Q3 Moderate Growth Amidst Demand & Consumption Challenges

FMCG sector is poised for limited revenue growth in the Q3 of FY24 due to weaker rural and urban sales, low farm incomes, and the rise of regional brands. FMCG firms focusing on expanding distribution networks are likely to see better revenue growth. The decline in costs of key raw materials (except wheat, sugar, and milk) has enabled local firms to compete more effectively, gaining market share. In response, larger companies are increasing advertising efforts and offering incentives to compete with these regional brands. Food and beverage categories are projected to perform better than home and personal care products.

Overall, FMCG companies might see a 5% year-on-year increase in both revenue and volume in Q3FY24, with a four-year compound annual growth rate of 10.4%. Analysts estimate a gross margin expansion of 230 basis points year-on-year and 50 basis points quarter-over-quarter for the sector. The EBITDA margin is expected to see a 30 basis points increase year-on-year but remain flat quarter-over-quarter. These figures reflect the impact of lower input costs, offset by higher advertising expenses.

Excluding certain large players, FMCG companies are anticipated to report a 6.2% year-on-year increase in EBITDA. Specific companies like Jyothy Labs, Emami, Colgate Palmolive, and Marico might see more than 250 basis points margin expansion year-on-year.

Indian Banking Sector: Q3 Earnings Outlook For Private Banks, PSBs & Fintechs

Expected to see some moderation in earnings for Q3 with analysts expecting NIM to ease compared to previous quarter. Q2 saw Indian banks reported healthy earnings with a 33% year-on-year growth in net profit, driven by a reduction in credit costs. For Q3, net interest income (NII) is expected to grow by nearly 9% year-on-year. Elevated operational expenses may lead to a 4% year-on-year decline in pre-provision operating profit. Let’s look at the different sub sectors in the Indian banking space:

Private Banks

• Private banks are estimated to report a 23% earnings growth year-on-year
• Current account and savings account (CASA) ratios are likely to moderate as deposits shift to higher-rate term deposits.
• Systemic NIMs are expected to moderate, albeit at a slower pace than in Q2FY24.
• Specific forecasts for private banks indicate an 8% year-on-year PPoP growth and 18% PAT growth, with a slight increase in opex.
• Earnings growth is likely to be driven by strong business growth and controlled credit costs, despite continued NIM compression. NII growth is expected to vary across different private banks.

PSBs

• Earnings growth is projected to moderate to 4% on a year-on-year basis, affected by higher opex and slight margin compression.
• NII growth is estimated at 6% year-on-year, while PPoP may decline by 12%. PAT is expected to grow by 3.6% year-on-year.
• Asset quality is likely to improve, with healthy recoveries and controlled slippages.

Fintechs & Small Finance Banks

• Small finance banks are also under scrutiny with margins being moderate & NIMs potentially decreasing for some players.
• Credit card spending and new account sourcing are expected to remain healthy. However, NIMs may see slight moderation and asset quality pressures could keep credit costs elevated. One major card company is projected to experience an 18% year-on-year earnings growth.
• For PAYTM, Q3 GMV is expected to grow by 37% year-on-year. Revenue from operations is likely to increase by 32% year-on-year, with a notable increase in contribution profit and a positive adjusted EBITDA.

Indian NBFC Sector: Q3 Steady Profit Growth Amidst NIM Moderation

NBFCs are expected to report healthy profit growth, despite a moderation in net interest margins (NIM). Strong loan growth, coupled with slight improvements in asset quality, underpins this outlook. The sector has seen accelerated loan growth in various segments, notably retail loans excluding housing, which grew by over 25% as of September 2023. However, growth in unsecured personal loans and credit cards is likely to slow, as lenders reduce exposure to these segments due to increased risks and regulatory caution.

For the October-December 2023 quarter, analysts anticipate robust demand leading to healthy AUM growth. Loan growth is estimated at around 20% year-on-year and 5% quarter-on-quarter.

• Vehicle Finance has not seen the expected NIM recovery due to sustained high funding costs, which may peak by mid-2024.
• Housing financiers are likely to experience sequential NIM compression due to rising costs of funds.
• Minor improvements in asset quality are expected in VF and mortgages, but microfinance institutions may see slippages, keeping asset quality range-bound.
• Credit costs are predicted to remain benign, except for provisions related to restructured loans and write-offs in the personal loan portfolio. Consequently, healthy profitability is expected with a 27% year-on-year increase in net profit. Net Interest Income and Pre-provision Operating Profit are both projected to grow by 22% year-on-year.

Indian Pharma Sector: Q3 Strong Earnings and Sales Growth

Pharmaceutical companies are forecasted to show significant year-on-year earnings growth of 19.7%. Total sales are expected to rise by 10.3% YoY to ₹69,300 crore, fueled by strong demand in the US generics market and robust results in the domestic formulation (DF) segment.

EBITDA is set to increase by 15.2% YoY due to lower operating expenses, including reduced freight and staff costs, and a higher percentage of niche product launches in the US generics sector. PAT is projected to grow even more rapidly at 19.7% YoY, reaching ₹9,700 crore, benefiting from a lower tax and depreciation rate. Additionally, hospital profitability is expected to improve due to better case mix and payor mix optimisation.

In the DF market, sales are anticipated to grow by 8.7% YoY to ₹18,400 crore in 3QFY24, mainly driven by strong performance in anti-infective, gastro, and pain therapies. However, the growth in anti-diabetic and dermatological therapies is expected to be moderate. Companies are focusing on niche product launches and enhancing medical representative productivity to boost sales growth and profitability.

In the US market, sales are projected to grow by 8.3% YoY to USD 2.2 billion for the quarter, a deceleration compared to the 15.8% YoY average growth witnessed in the previous four quarters. The US generics market is likely to benefit from reduced pricing pressure and the popularity of products with limited competition.

Indian Construction Sector: Q3 Steady Growth & Stable Margins

EPC companies are expected to experience solid revenue growth in Q3 FY24. Construction firms are projected to see a 10% year-on-year increase in sales. Companies with a strong order book are likely to see higher revenue growth. Government infrastructure spending has been growing steadily. Despite a typical 5% decline in project execution during election years, FY24 is expected to show strong performance, with a potential dip in FY25.

• Toll-based asset revenues are forecasted to rise by 5% sequentially.
• EPC EBITDA margins are likely to stay consistent with the previous quarter.
• Average order book-to-sales ratio is slightly lower than in March 2023.
• First half of FY24 saw a 21% contribution to the order book. Looking ahead, a 10% average EPC sales CAGR is expected from FY23 to FY25F, similar to previous years.

Best Sectors For Q3 Earnings

Here are the key takeaways from our perspective in the upcoming corporate earnings:

Banking Sector

• This sector is expected to perform well, driven by robust credit growth and sustained momentum. Contrary to some expectations, net interest margins (NIM) might not ease significantly, which could contribute to stronger financial performance. The overall growth trajectory for the banking sector appears positive.
• Although they have been subdued, the broader trend in the banking sector is strong, supported by healthy credit growth. The large-cap space in banking is considered undervalued, and with the inflow of foreign institutional investors (FII) money, these stocks could attract attention.

Housing Finance and Financial Companies:

These are good picks due to the anticipation of strong numbers. With an emphasis on domestic growth, these segments are poised for a potentially profitable outlook.

Pharmaceutical Sector

The pharma sector is also looking promising, particularly due to growth in the domestic market. This could be a strategic area for investment.

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