Federal Bank To Mahanagar Gas: HDFC Sec Rejigs India Portfolio, Adds 5 Stocks Ranging Rs 100-1,000

The recently concluded September quarter (Q2FY24) earnings season has seen a mixed bag of results, showcasing an overall in-line performance by all sectors. However, wide divergences were also visible across sectors and companies, giving a nuanced picture of the current economic landscape.

In a comprehensive report, HDFC Securities identified a key theme in the quarter, which was a continuation of input cost deflation. Despite a muted Year-on-Year (YoY) revenue growth, companies managed to stay profitable. The brokerage firm emphasized that the era of benefiting from commodity cost deflation is likely drawing to a close, and future earnings growth must be volume-led.

According to HDFC Securities, large-cap stocks are also in the limelight, accounting for a 37% YoY growth in incremental earnings, while their midcap counterparts lagged at 12% YoY growth. On the sectoral front, the report revealed that 88% of incremental YoY earnings growth emerged from just three sectors-energy (56%), auto (16%), and lending financials (16%).

The standout performers for YoY earnings growth included the auto, lending financials, industrials, real estate, energy, cement, and pharma sectors. Conversely, staples, metals, chemicals, IT, and consumer discretionary sectors fell short of expectations.

Looking ahead, HDFC Securities projects robust earnings growth for FY24 and FY25, anticipating a recovery in margins and sustained demand momentum. Excluding the energy sector, which faced challenges in FY23, the coverage universe is expected to witness earnings growth of 18.8% and 15.5% for FY24 and FY25, respectively.

The report highlights several factors investors should monitor in the second half of FY24. These include weather conditions, geopolitical tensions, potential credit events, the US economy's trajectory, credit costs for Indian lenders, inflation levels, and the 2024 general elections.

Expressing caution, HDFC Securities notes that while the current forward valuations are in line with long-term averages, a slight PE derating is plausible in H2FY24. The market cap to GDP ratio for India is currently high, signalling a potential need for investors to review asset allocation and trim excess exposure to equities.

The brokerage suggests a proactive approach for investors, urging them to conduct an asset allocation review and refine their equity portfolios. Identifying sectors with growth potential, such as large-cap banks, industrial and real estate, power, autos, pharma, OMCs, gas, and capital markets, is crucial. Meanwhile, a cautious stance is recommended for consumer-related sectors, metals, chemicals, and small banks.