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Citi Research: Nifty Expected To See 14% Earnings Growth For Couple Of Years

The energy sector has shown robust numbers, and certain stocks in the industrials sector have performed well.

<div class="paragraphs"><p>(Source: NDTV Profit)</p></div>
(Source: NDTV Profit)

Earnings are holding up well and there is an expectation of a 14% compound annual growth rate in earnings for the Nifty for a couple of years, according to Surendra Goyal, head of Citi Research India.

Goyal said the overall sentiment is upbeat and the third-quarter earnings support the future outlook. "When we talk to investors, valuations are something that comes (up) in talk. The premium to other emerging markets is significant," he told NDTV Profit in an interview.

On the third-quarter performance, Goyal said there had been a significant number of upgrades, especially in sectors like autos, driven by improved margins. The energy sector has shown robust numbers and certain stocks in the industrials sector have performed well.

On the flip side, there have been downgrades in the financial sector, while some select materials have also experienced downgrades, he said. "Other larger sectors had pretty much the same trajectory."

Underwhelming Deposit Growth

The focus is on the banks' performance, where headline earnings showed improvement, according to Kunal Shah, research analyst – Indian banks, financials at Citi Research.

However, qualitatively, there is an underwhelming performance in deposit growth and a moderation in loan growth compared to what was observed in the second quarter, Shah said.

There has been a slight increase in retail slippage, although it is not uniform across all banks but specific to certain areas. On the qualitative aspect, the overall performance did not fare well, he said.

The narrative and focus for many banks are centred around driving growth through deposits. There is a tightening of liquidity, and challenges are being encountered in mobilising deposits, according to Shah.

Some banks are experiencing difficulties on the growth side, he said. "There was not too much disappointment on the margins."

Operating leverage delta, which remains available, will support earnings growth as we move into financial years 2025 and 2026, he said.

The public sector banks are typically cyclical, while private banks are more structural, Shah said. "We like HDFC Bank, ICICI Bank and IndusInd Bank."

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Continued Recovery Of Capex

In the industrial sector across the board, both big and small companies experienced good-to-very good order inflow in the third quarter. This indicates a continued recovery in capital expenditure in India, according to Atul Tiwari, research analyst – industrials, electric utilities and property.

Valuations in certain areas might be relatively high and as long as the order growth remains at 20–25% or higher, return on capital stays high and there is a consistent inflow of cash. These valuations are likely to be sustained, he said.

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Earnings Upgrades In Energy Sector

Companies in the energy sector, particularly the downstream or oil marketing firms, have consistently reported strong and robust numbers. There is a trend of ongoing earnings upgrades in this sector, according to Saurabh Handa, research analyst - oil, gas, telecom at Citi Research.

"We believe there is still room for stocks to go up further from here," Handa said. Specifically, he is positive on Bharat Petroleum Corp. and Hindustan Petroleum Corp. recommending a 'buy' on these stocks.

Looking forward to the next fiscal, the earnings outlook appears fairly optimistic, given the expectation that crude oil prices will remain range bound, according to Handa.

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View On IT, BFSI

On information technology sector, the crucial factor will be the slope of recovery. Goyal said the expectation is for fiscal 2025 to outperform the current one.

However, in their India strategy, there is still an underweight position on IT services, Goyal said.

Watch the full conversation here:

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Edited excerpts from the interview:

Surendra, if I can start with you, end of Q3, are you guys more upbeat about the earnings’ reportage, based on what was reported and the con-call analysis that you've done for Q4 or are you a bit circumspect?

Surendra Goyal: So, to begin with, see, more than the earnings, we look at the upgrade-to-downgrade ratio, which again, was positive both for FY24 and FY25 within our coverage. So that kind of tells you that things are progressing in the right direction. And if you look at the consensus Nifty earnings forecast, it has pretty much remained unchanged through the year. If you go back historically, we have started off high and then there have been downgrades, for most years, if you take the last decade, barring one or two years. That's been the usual trend. So in that context also, the earnings are holding up pretty well and it's a fairly good level of earnings also.

So as we go forward from here, there is generally an expectation that we still have around a 14% earnings CAGR for Nifty over the next couple of years. So to that extent, I would say that yes, sentiment has been pretty upbeat, but this quarter's earnings kind of supported that. And even the upgrade-downgrade ratio which I spoke about, everything is kind of pointing to things trending in the right direction.

Good to hear. Where is it that there have been the largest upgrades to your mind, per se? Let's talk about the good news first and where is it that some of that might be priced in already?

Surendra Goyal: So if you look at sectors like autos, that is where a significant upgrade came in, and again, a lot of it is driven by margins. The mix and then in turn margins, that was one. We have Saurabh Handa, who can talk about energy. Those numbers have come in fairly strong. Industrials is the other one, where again, certain stocks, etc, have done well. So these are sectors where there have been fairly good upgrades.

In terms of downgrades, I think financials are definitely at the margin, things have been a little soft. Kunal here can talk about it. So there, I think we have seen some softness. Some select materials, I would say, not broad-based, have seen some downgrades.

Other larger sectors, I would say, pretty much have the same trajectory. No big changes.

Where all do you reckon some of these upgrades are priced in, or that the downgrades have not necessarily made the stocks too unattractive because the prices may already have been baking some of the weaknesses?

Surendra Goyal: So, for example, if you look at financials and again banks, specifically within financials, if you look at the valuations in the context of history, the valuations are already pricing in some of this weakness. So if you look at versus five years or versus 10 years, banks are at a discount to those means and averages, which is not true for the broader market. So I would say there I think some of the weakness is priced in.

I think the question, which people are debating, is how much of this is like a 2-3 quarter thing, or is it kind of longer drawn out? So that's one sector where I think a lot is kind of priced in. In terms of some of the sectors like industrials and again, select pockets within industrials, for example, numbers are strong, but then the multiples are also quite elevated. So to that extent, I think there is a fair bit of optimism already priced in.

In general, I would say I think when we talk to investors also valuations is something that comes up in almost every discussion, because the market at 20-21 times is definitely higher than where it is historically traded and the premium to other emerging market