Q3 Earnings Review: Consumption slowdown, commodity weakness hurt India Inc’s profits. MOSL advises portfolio rejig | Stock Market News

In a recent note, brokerage house Motilal Oswal Financial Services (MOSL) stated that a slowdown in consumption and commodity weakness have weighed on corporate earnings, even as sectors such as BFSI, Healthcare, Capital Goods, and Technology delivered strong performances.

However, the government’s shift from capital expenditure to consumption in its latest budget is expected to trigger a realignment in investment portfolios, leading to a potential moderation in valuation multiples across the Industrials, Capital Goods, and Manufacturing sectors.

Consumption Trends and Market Valuations

MOSL noted that the underperformance of Consumer Staples may be nearing an end as the government’s ₹1 trillion tax relief for middle-class taxpayers is expected to boost consumer spending in the coming quarters. This could lead to a rebound in valuation multiples for consumption-driven companies, particularly in the Staples segment, after a prolonged de-rating since FY20.

Additionally, the Nifty 50 is currently trading at a 12-month forward price-to-earnings (P/E) ratio of approximately 20x, below its long-period average (LPA) of 20.6x. Given the significant premiums at which broader markets are trading relative to their historical averages, MOSL remains inclined toward large-cap stocks, with a 76 per cent allocation in its model portfolio.

The brokerage maintains an overweight stance on Consumption, BFSI, IT, Industrials, Healthcare, and Real Estate, while remaining underweight on Oil & Gas, Cement, Automobiles, and Metals.

Top Stock Ideas

MOSL’s top large-cap stock recommendations include ICICI Bank, SBI, Bharti Airtel, Hindustan Unilever (HUL), L&T, LTIMindtree, Sun Pharma, Maruti Suzuki, M&M, Titan Company, Trent, and Cummins India.

Among mid-cap and small-cap stocks, MOSL has identified Indian Hotels, Dixon Technologies, BSE, Godrej Properties, JSW Infrastructure, Coforge, Page Industries, IPCA Labs, Metro Brands, Angel One, and Vinati Organics as preferred picks.

Q3 FY25 Earnings Review

MOSL highlighted that Q3 FY25 earnings have met moderate expectations. However, forward earnings revisions are witnessing the weakest trend in recent times, with downgrades far exceeding upgrades, especially among non-Nifty 50 stocks. 

The brokerage expects the Nifty 50 to post a modest 5 per cent earnings per share (EPS) growth in FY25E, following a compounded annual growth rate (CAGR) of over 20 per cent between FY20 and FY24.

For the 183 companies in the MOSL Universe, revenue, EBITDA, profit before tax (PBT), and profit after tax (PAT) grew by 5 per cent, 8 per cent, 7 per cent, and 3 per cent year-on-year (YoY), respectively, broadly in line with estimates. Excluding Metals and Oil & Gas, these companies recorded a higher YoY growth of 10 per cent in sales, EBITDA, PBT, and 8 per cent in PAT.

Sectoral Valuations and Trends

MOSL observed that two-thirds of sectors are currently trading at a premium to their historical averages. The Technology sector, for instance, has a P/E ratio of 27.6x, representing a 31 per cent premium to its long-term average of 21x. While recent guidance from major IT players such as Infosys and HCL Tech was muted, overall sentiment in the sector remains positive, with IT spending recovery expanding beyond BFSI into Hi-Tech and Retail, said the brokerage.

Private banks are currently trading at a price-to-book (P/B) ratio of 2.2x, a 12 percent discount to their historical average of 2.5x. Loan growth stood at 11.5 percent, declining from its peak of 18 percent, as competitive deposit markets and a higher credit-to-deposit (CD) ratio continue to limit lending growth. Meanwhile, unsecured lending stress persists, and the CASA ratio remains under pressure due to faster growth in term deposits.

The Consumer sector is trading at a P/E of 42.9x, in line with its 10-year average of 42x, while its P/B ratio stands at 10.4x, close to its historical average of 10.3x. Demand recovery remains sluggish, with urban consumption under strain, while high food inflation and rising palm oil prices have placed further pressure on margins. However, consumer companies have initiated price hikes to mitigate these challenges.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.