HDFC Bank, RIL, Infosys: Nifty Q3 results defy numbers and narratives, says Kotak

Nifty companies announcing quarterly results so far – including HDCF Bank Ltd, ICICI Bank Ltd, Reliance Industries Ltd, Infosys Ltd and Tata Consultancy Services Ltd -- logged 18 per cent growth in combined net profit on year-on-year basis, which Kotak Institutional Equities said were 4 per cent higher than its expectations. But the brokerage felt the Q3 results defied both numbers and the market narratives.

Banks reported better-than-expected numbers, while IT services reported a mediocre performance, it said adding that consumer companies struggled for growth for another quarter, while the residential real estate sector continues to boom.

"3QFY24 continued with the trends of the past few quarters. They reinforced the dichotomy that has persisted in the Indian economy for more than a year. Consumption continues to be weak, highlighting the challenges of low-income households and investment, especially high-end residential real estate, continues to be strong, stressing the solid financial condition of the high-income households," it said.

Kotak said while Nifty Q3 results were moderately ahead of its estimates, most of the beat came in from banks, ironically.

"However, banks’ multiples saw further bruising due to ‘negative’ narrative (peaking-out thesis) and incremental developments (deposit challenges, lower NIMs) despite a compression in NIMs over FY2024-25E being factored in numbers. IT services companies reported weak results in general (again), but the multiples reflect a ‘positive’ narrative (bottoming-out thesis) and incremental developments (recovery in revenues) even though the recovery in revenues is factored in the numbers," Kotak said.

Kotak said weak consumption trends in the December quarter too; no quick fix for consumption We do not see a quick fix for low-income household consumption without a solid and sustained recovery in jobs and income. As discussed in several reports in the past few months, weak consumption reflects: low growth in income; most new jobs are in the low-income segments. It said prices of common products have risen sharply in the past 4-5 years.

"Other investment companies yet to report; interim budget important. We will get a better sense of the sustainability of the investment cycle in the next few days as (1) companies in the capital goods sector report their earnings and give guidance on near-term order inflows and (2) the Indian government presents its interim budget on February 1, which will give guidance on government capex for FY2025E," Kotak said.

Kotak is assuming 15 per cent growth in government capital expenditure for FY2025, with much higher numbers for railway and road sectors. "The multiples of the investment stocks have rerated sharply in the past 1-2 years on the narrative of a strong cycle; these multiples would now need the backing of solid numbers," it said.

Kotak said it is sticking with sectors and stocks that are reasonably valued or moderately overvalued. The market is either overestimating the market size and profitability in several sectors (automobiles & components, capital goods, electric utilities) or underestimating ‘disruption’ risks in same or other (automobiles & components, consumer staples, consumer durables & apparel, commodity chemicals, IT services).

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