The second quarter of the fiscal year 2023-24 has witnessed a strong performance by the auto and banking sectors, as they have reported higher than expected earnings growth and improved margins. The domestic cyclicals have benefited from the recovery in demand and the low base effect of the previous year. The analysts have also upgraded their estimates for the full year earnings of these sectors, as they expect the momentum to continue in the coming quarters.
Auto sector: Volume growth and cost control boost profitability
The auto sector has seen a robust volume growth in the September quarter, as the passenger vehicle and commercial vehicle segments have registered a double-digit increase in sales compared to the same period last year. The two-wheeler and tractor segments, however, have witnessed a decline in volumes due to the impact of the second wave of the pandemic and the weak monsoon. The auto companies have also managed to control their costs and improve their operating leverage, as they have passed on the increase in raw material prices to the customers through price hikes and discounts. The auto sector has reported an average revenue growth of 18% YoY and an EBITDA margin expansion of 350 bps YoY in Q2.
Some of the notable performers in the auto sector are:
- Maruti Suzuki: The country’s largest carmaker has posted a 10% YoY growth in its net profit to ₹1,996 crore, beating the consensus estimates by 7%. The company has also raised its FY24 volume growth guidance to 12-14% from 10-12% earlier.
- JSW Steel: The steel major has reported a whopping 82% YoY growth in its consolidated net profit to ₹5,900 crore, surpassing the analysts’ expectations by 16%. The company has also achieved a record EBITDA margin of 36.8% in Q2, driven by higher steel prices and lower coking coal costs.
- Apollo Tyres: The tyre maker has delivered a 131% YoY growth in its net profit to ₹271 crore, exceeding the market estimates by 9%. The company has also improved its EBITDA margin to 16.4% in Q2, up from 14.6% in Q1, on the back of better product mix and operational efficiency.
Banking sector: Asset quality improvement and credit growth support earnings
The banking sector has shown a significant improvement in its asset quality and credit growth in the September quarter, as the impact of the second wave of the pandemic has been less severe than expected. The banks have also benefited from the low base effect of the previous year, when they had to make higher provisions for the potential stress due to the moratorium and restructuring schemes. The banking sector has reported an average net profit growth of 30% YoY and a net interest margin contraction of 15-20 bps QoQ in Q2.
Some of the notable performers in the banking sector are:
- Bandhan Bank: The microfinance lender has posted a 226% YoY growth in its net profit to ₹1,078 crore, beating the consensus estimates by 11%. The bank has also improved its asset quality, as its gross non-performing asset (GNPA) ratio has declined to 8.2% in Q2 from 8.3% in Q1.
- PNB: The public sector bank has reported a 129% YoY growth in its net profit to ₹1,023 crore, surpassing the analysts’ expectations by 12%. The bank has also reduced its GNPA ratio to 11.3% in Q2 from 12.9% in Q1, aided by higher recoveries and write-offs.
- IndusInd Bank: The private sector bank has delivered a 71% YoY growth in its net profit to ₹1,210 crore, exceeding the market estimates by 8%. The bank has also witnessed a healthy credit growth of 11% YoY and a stable NIM of 4.1% in Q2.
Analysts revise FY24 earnings estimates for auto and banking sectors
The strong earnings performance by the auto and banking sectors in Q2 has prompted the analysts to revise their earnings estimates for FY24. The analysts have also factored in the positive outlook for these sectors, as they expect the demand recovery to sustain and the asset quality to improve further in the coming quarters.
According to Motilal Oswal Financial Services, the FY24 earnings per share (EPS) estimates for the Nifty 50 index have been marginally cut by 0.3% to ₹986, while the EPS estimates for the auto and banking sectors have been upgraded by 10% and 4%, respectively. The brokerage firm has also raised its target price for Maruti Suzuki, JSW Steel, Apollo Tyres, Bandhan Bank, PNB and IndusInd Bank, among others.
According to Kotak Institutional Equities, the FY24 EPS estimates for the Nifty 50 index have been reduced by 0.9% to ₹1,132, while the EPS estimates for the auto and banking sectors have been increased by 9% and 3%, respectively. The brokerage firm has also upgraded its ratings for Maruti Suzuki, JSW Steel, Apollo Tyres, Bandhan Bank, PNB and IndusInd Bank, among others.
