The season has been subpar. What is important for you to get the season and advance is the sector that you think is ready for further updates or get a surprise if at all?
Gautam Duggad: Yes, the season has been very soft and after a long time we have seen more downgrades than upgrades. So, if you look at it in absolute terms, up to this quarter for the world of coverage that has sent a number of more than 225 companies. Year-to-date, earnings fell 4% against expectations of a 1.5% decline. Of course, it is strongly influenced by the drag of commodities. If you exclude only three OMC companies, earnings rose 6% compared to expectations of around 5%, in general. And if you go further and take out all the metals and oil and gas, which is basically all the commodity companies, then it’s about 205 companies that are tracked out of the 226 that I mentioned at the beginning, if you exclude those 21 commodity companies. earnings up close to 10% which is in the line.
So, while earnings are soft and we’ve seen a very different moderation across the board, the picture looks better if you factor in the big drag from some commodity-oriented sectors. For Nifty also flat earnings, but more importantly internals earnings are very weak. As you know, we got about 100 companies with more than 3% for FY25 and we only upgraded about 36-37 companies, so it’s close to 3:1 for decline.
Secondly, we have cut earnings for Nifty and also, EPS, by close to another percent in our interim review. This is on top of the 3% or 3.5% earnings cut that was taken during the preview. So, net-net, from April to November now, our EPS estimate for the Nifty has come down by close to 8%, from Rs 1,140 to now around Rs 1,060, which means FY25 will only be a 5% earnings growth year. We are not used to single digit earnings growth for the last five years now. Between FY20 and FY24, every year was a double-digit revenue growth year and we had a 21% compound revenue growth between FY20 and FY24. Clearly FY25 happens to be a bit of an outlier in the five-year, six-year trend where things are a bit slower, there’s moderation, there’s breathing, and of course it’s also a reflection of government spending. down.
In the first half, government spending was uneven. Capex spending fell by 17%. So, hopefully in the second half, government spending and capex spending will increase. There is a good monsoon. Consumption, which has been the weakest point in this income season, has also revived as the kharif harvest should be good. This is the matter as we stand here. As per your question about sector, so this quarter we have seen very strong performance from PSU banks.
In fact, it is the only component in the universe of coverage that we have seen six of the six PSU banks we track have beaten our expectations. Apart from the PSU banks, the health has been good, it has also met the expectations, real estate has been very good, then IT is in line and you can say even consumers are in line, but very soft. We expected 3% growth, got zero. So there are only a few that really like it across the spectrum of sectors that we cover. Apart from PSU banks, healthcare, and real estate, few sectors have seen double-digit growth.
What do you do about looking at all the pickups in capex and how do you read the numbers from some of the engineering companies in the space? How do you see the order in general? Would you like to see the earnings that maybe there is a miss this time?
Gautam Duggad: In the world of capital goods and industrials that we cover, the numbers are better than expectations, because some heavyweights like L&T, where the expectations are very low and beat the expectations. We’ve seen good numbers from Cummins. The only thing I miss is ABB. So, overall, in a very soft scenario and top-down as well as capex down, at least this quarter, the impact is not clearly visible, so I mentioned that in October and the government machine starts spending, capex spending starts to revive. , because it appears in the numbers. The government has budgeted Rs 11.1 crore of capex spending this year. In the first half, which is April to September, total capex spending fell by 15% to 17%, while the full-year expectation is that for the budgeted amount, it should grow by 17%, which means for the second half. from FY25 capex spending should go up 52% ​​YoY which is very difficult for me.
Even if it goes up 30-40%, it will provide a very strong footing for the execution and order book. So, in any correction, we are very positive about the industry. We are very overweight there. We have L&T. We have ABB in our model portfolio. Any correction is because of a quarter or two quarters of land revenue, must buy to, provided one has at least a three-year horizon because this government has been very clear in the last seven or eight years, they are very pro- capex, pro-manufacturing, make pro-infrastructure . So, whatever you get every quarter for earnings, I would think that’s a buying opportunity.
You said you have cut the EPS forecast, 2060 there versus 1140. That means we are still trading at 22-23 times forward earnings. Is there scope for price expansion as earnings decline? What will provide the legs until good because now we are at 22-23?
Gautam Duggad: I don’t think there is room for re-rating or PE times expansion because in the last six months, earnings have been cut by 8% from 1140 to 1060 and good has also been 8% downtick. The 52-week high is somewhere around 26,200. Currently, we are in the 24,200 -24,300 range. So, earnings have been cut by 8%. Good has also reduced by 8%, which means that your PE ratio has not degraded in the last six months.
The index has fallen, driven by earnings cuts. In fact, the midcap, smallcap, broader markets are still trading at very high valuations. If you look at the PE of the midcap index, the NSE 100, which two-three months ago was trading at 35 PE, it has now come down to 30 but is still at a 25-30% premium to the Nifty. This premium is obviously 60%, which is actually unsustainable in our view as it has never traded at such a premium for a long time in the last two decades.
Even now, after the correction, at the index level, the midcap index is still trading at a 30% premium to the Nifty. So, yes, the growth or more return from here even if you’re talking about largecap is going to be a function of how much earnings we’re going to make over the next two years. We expect around 15-16% growth in FY26. FY25 is 5%. FY25 ex-commodity is 10%. So 10%, we expect to move to 15-16%. In fact, I would say that in the next three to four months, it is not going anywhere and it consolidates in some of these, at least it will provide some cushion for the price to rise in the next 24 months because we have a phenomenal phenomenon. for two to three years in the broader market.
Of course, the Nifty has been very subdued. Coming to Nifty’s trailing three-year return – October ’24 or November ’24 versus November ’21, Apik has been given 11% three-year compounding, while mid and smallcap has been given 21% and 23% compounding on a three-year basis. So, from here, the room for price expansion is very limited and will be a function of the amount of earnings you can get from any given index.
