India's 'goldilocks' scenario rests on corporate earnings growth trajectory, notes HSBC

Stock market outlook: Amid escalating concerns about global growth, India stands out; however, its corporate earnings resilience is key to sustaining positive momentum, note analysts at HSBC, the global financial services company, in its latest report, issued on August 23. The shape of the earnings growth trajectory this year is more critical than an average year, and India's "goldilocks" scenario rests on it, they added.

The global brokerage firm notes that India has been the best-performing market since March 2023. FTSE India index is up 16.7 per cent in US dollar terms (vs FTSE Asia Ex-Japan down 5.2 per cent) as of August 21, led by around $21 billion FII flows, well supported by strong earnings outlook and relatively stable macro conditions. After this rally, valuation has risen, inflation has shown a somewhat worrisome uptick (July inflation came in at 7.4 per cent), and crude has inched up, the report adds.

The brokerage has made the following observations regarding India Inc's June quarter numbers (Q1FY24).

Q1 was a mixed bag, with some hits and misses. "At the aggregate level, for 130 companies in our coverage, revenues were broadly in line. But earnings beats and misses were equally split at one-third of companies each, a slight deterioration in the momentum built last quarter," wrote Amit Sachdeva, the India Equity Strategist and Consumer & Retail Analyst at HSBC, in a co-authored report by analyst Anurag Dayal and Herald van der Linde, Head of Equity Strategy, Asia Pacific.

"Nonetheless, earnings growth on average was strong: for our coverage universe, average sales, EBITDA, and PAT grew by 6 per cent, 21 per cent and 42 per cent YoY, broadly tracking expectations, aided by margin expansion as key commodity costs declined. On average, the earnings growth trajectory for FY24 remains stable (around 18 per cent YoY for Nifty50)," the report said.

Sectors that saw upgrades

The pharmaceutical sector witnessed significant earnings upgrades with an improved outlook. Autos, cable & wire companies, energy, banks, and NBFCs' FY24 earnings were revised upwards as well.

Sectors that saw downgrades

Consumer durables, retail, utilities, agrochemicals, and the IT sector saw downward earnings revisions post-June quarter results.

Key observations 

HSBC notes that margin tailwinds for companies are expected to continue, and while rural demand on average is still lacklustre, companies expect demand to pick up gradually in the second half. However, rising inflation and its impact on demand and the prospects of banks' NIM (net interest margin) compression (even though banks delivered strong 1Q earnings) are key risks through FY24-end. Industrials (excluding logistics) had a good 1Q, with strong order inflows and an outlook aided by continued governmental capex even as exports look vulnerable.

Comment on Indian market

The analysts at HSBC remain constructive on the Indian market, which they believe is going through a bullish phase. Given the valuation levels (slightly above the 5-year mean), market breadth of 85 per cent and some emerging concerns such as inflation, earnings resilience, and earnings growth outlook will likely remain the key catalysts for the rest of 2023, they note.

"Q1 results on average still point to a strong earnings growth outlook for FY24 that should stand out amidst the general global slowdown narrative," the report added.