MSCI India profit growth slows, says Goldman Sachs

Investing.com -- The first quarter earnings season for India has wrapped up, showing a mixed performance across sectors. Profit growth for the MSCI India Index moderated to 9% year-on-year (y/y) from 16% y/y in the previous quarter. 

“There was a notable drag from Energy, while Banks contributed meaningfully to growth,” said analysts from Goldman Sachs. 

The reported profit growth for MSCI India was ahead of the consensus estimate of 3% y/y, indicating a better-than-expected performance overall. 

However, the profit growth of 9% was below the historical average, reflecting the ongoing challenges in certain sectors of the economy.

The earnings season was marked by a divergence in performance across various sectors. Defensive sectors like Telecommunications and Utilities emerged as strong performers, with 42% of companies in these areas surpassing market expectations. 

This outperformance was largely attributed to strong fundamentals and stable demand, which contributed to an average earnings surprise of around +3%. 

Many companies in these sectors managed to exceed projections, reflecting their resilience and consistent market demand.

The Cement and Commodities sectors faced the most  challenges, with a substantial number of companies missing their earnings forecasts. The issues were exacerbated by weak demand in the Cement sector due to monsoons and elections, and in Commodities, by global price volatility and input cost pressures.

Overall, the MSCI India companies recorded an average earnings surprise of +3%, with the number of beats outpacing misses (42% beats versus 34% misses). This is a positive indicator, suggesting that despite the moderation in profit growth, many companies managed to exceed market expectations.

While IT companies reported cautious sentiment around discretionary tech spending, there was a noticeable shift towards optimism. 

This is due to improving sequential growth and a robust deal pipeline, signaling potential recovery in the coming quarters.

The Cement sector faced subdued demand due to the monsoon season and election-related disruptions. However, management teams expressed confidence in a rebound in demand starting Q3 FY25, driven by government infrastructure projects.

“Staples companies are seeing green shoots in rural recovery, with rural growth outpacing urban in recent months. Managements expect the improvement to continue, aided by stable inflation, healthy monsoon and government’s budgetary support,” the analysts said. 

The overall earnings sentiment has softened slightly, primarily due to downgrades in the Commodities and Cement sectors. Consensus estimates for MSCI India’s CY24 EPS were trimmed by 0.5% quarter-to-date, reflecting the cautious outlook for these sectors. 

Despite these adjustments, analysts at Goldman Sachs remain optimistic about the mid-term growth prospects, retaining a forecast of mid-teen growth for CY24 and CY25.

Goldman Sachs have adjusted its CY24 EPS growth forecast down by 1 percentage point (pp) to 14%, while maintaining a 15% growth forecast for CY25. These projections are in line with the consensus and reflect cautious optimism.

The outlook remains more favorable for consumer-sensitive and defensive sectors, which are expected to see slightly higher growth. Conversely, growth expectations for commodity and capex-sensitive sectors have been lowered due to the ongoing challenges.