The GDP numbers for major countries in the most recent quarter, were a big 'ouch', painting a grim picture of the global economy. The UK reported negative growth and entered a technical recession, hurting its already unpopular Prime Minister, Rishi Sunak. Germany and Japan are in the same boat.

So far, India is better placed. Although official GDP growth figures haven't been released yet for the December quarter early estimates suggest a strong growth rate of 6.5%-7%. Jefferies predicts that the Indian economy will become the third-largest by 2027.

India’s growth has been helped by muted inflation, the China +1 strategy, a stable currency, and higher government spending.

For Nifty 50 companies, revenue has grown on average by 6.2% YoY in the December quarter, slower than India's expected GDP growth. The difference suggests a slowdown in the formal sector, due to downturns in major industries like IT, agrochemicals, specialty chemicals, and packaged foods.

But if we look at profit, the Nifty 50 registered an impressive 17.3% YoY growth, thanks to lower input costs and product premiumization. Sectors like auto, metals and realty are outperforming the broader market in profit growth. Five Nifty companies — Tata Motors, HDFC Bank, Tata Steel, ICICI Bank, and JSW Steel — contributed 56% of the index's YoY profit growth.

The Nifty 50’s current PE stands at 22.8, which is below its five-year average of 25.9. The lower valuation is due to a slowdown in the overall topline, and concerns over debt-fueled consumption. 

• Nifty 50 results review: IT and chemicals underperform, while auto and metals shine
• Screener: Nifty 50 stocks surging over the past month with rising operating profit and operating profit margin

Let’s get into it.

Concerns rise with revenue slowdown

The Nifty 50 reported subdued revenue growth in the latest quarter, due to multiple factors - a weaker-than-expected monsoon from the El Nino effect, soft rural demand, and reduced global IT spending.

The IT sector, a heavyweight in the Nifty 50, saw only a 3.2% increase in the top line, and marked its first net profit decline of 1.4% in the past 26 quarters. 

Revenue trends: Auto, metals, realty, and banks excel amid slowdown in chemical, IT, and OMC sectors

Packaged food and agrochemical sectors were especially hit by lower rural consumption. "Urban growth has continued to outpace rural growth across many industries, and an uneven monsoon hit kharif crop output," Rohit Jawa, the CEO of HUL noted. Although a good monsoon in FY25 is expected to drive a recovery in rural spending, many companies in consumption-driven sectors still see muted demand in the first half of FY25.   

The refineries and petroleum sector suffered from lower consumption and crude prices, though the demand for petroleum products is expected to grow by 3% in FY25. Specialty chemicals faced challenges from higher Chinese imports, which has pressured domestic sales volumes and margins.

On the other hand, industries like banks, auto parts & equipment and iron & steel products have led revenue growth for the Nifty 50. Banks benefitted from higher loan growth, while the auto sector’s revenue was boosted by price increases and festive season sales. 

Margin growth helps the bottom line

The Nifty 50 saw its profit margins grow because of lower input costs, festive demand, higher price realization, increased exports, and a stronger USD.

Nifty 50 sees margin expansion in four consecutive quarters

Margins in the auto parts and equipment industry got a boost from lower commodity prices and higher price realization, with an uptick in volumes during the festive season.

Oil marketing companies have benefited from buying crude at lower prices from Russia and exporting more refined oil to European nations, improving refining margins. However, this may change as nations buying from Russia face a higher risk of sanctions.

The iron & steel industry saw better margins from domestic consumption and lower costs. However, rising Chinese imports have put pressure on margins lately. Meanwhile, the pharma sector has benefited from stable prices in the US, and better domestic sales.

Banks and IT sector to drive earnings in FY25

The banking sector has seen margin contraction this quarter due to the rising cost of funds and lower yields on advances. But with interest rates expected to drop in FY25, banks should see margins recover, supported by high loan growth. Credit growth in banks is projected at  14% for FY25, with profits expected to grow by around 22% YoY. 

India's IT sector, which had surged during the Covid years, has been impacted by spending cuts by BFSI clients, leading to lower revenue and margin contraction. As interest rates surged globally, customers have also postponed IT infrastructure spends.  

With its cash cow failing to deliver, tech CEOs are looking for other ways to grow. New verticals are all the rage - utilities, telecom, automobile, retail and manufacturing. Tech companies are also tapping into newer markets in Asia, Africa and the Middle East. Wipro for example, is bullish on digital solutions and AI in FY25, while HCL Tech is betting on non-BFSI verticals. TCS is expecting a surge in order inflows from India.

With global interest rates expected to drop post-June 2024, the IT sector may see a revival in client spending, especially in Q3FY25. 

Banks set to boost topline, IT eyes margin expansion in FY25 

Nifty 50 valuations appear reasonable

The Nifty 50 has gained 12.2% in the past month, sparking debate on whether it's valued too high compared to its global peers. Given India's status as the fastest-growing major economy and Nifty 50’s impressive 17.2% earnings growth in Q3FY24, a premium valuation seems justified.

The Nifty 50’s current PE of 22.8 is also below its 5-year and 10-year averages.

Nifty 50 PE trades below long-term averages

The lower valuation compared to historical averages is on account of a slowdown in its topline and an expected margin moderation in FY25. The index's long-term averages were also marginally skewed by the high valuations in the Covid period.

However, the Nifty 50’s one-year forward PE of 19.4 suggests that the valuation is within a reasonable range, and FY25 will give it more room to grow.

Screener: Nifty 50 stocks surging over the past month with rising operating profit and operating profit margin

BPCL leads in month change, while Adani Ent leads in operating profit margin growth

Continuing our analysis of the Nifty 50's performance, we look into which stocks in the index have the highest YoY growth in operating profit and operating profit margin in the latest quarter. 

This screener focuses on Nifty 50 stocks that have surged over the past month, and saw a rise in operating profit and operating profit margin.

Leading the pack is the automobile & auto components sector, with five out of 11 stocks coming from this sector. Major stocks that appear in the screener are Bharat Petroleum Corp, Mahindra & Mahindra, Power Grid Corp of India, Tata Motors, Maruti Suzuki India, Adani Ports & SEZ, Sun Pharmaceutical Industries and Adani Enterprises.

Mahindra & Mahindra has risen by 19.3% over the past month, owing to its operating profit growing by 18.5% YoY to Rs 6,224 crore in Q3FY24. Its operating profit margin also expanded by 48 bps YoY to 17.6%, helped by increased sales of premium vehicles (XUV 700, Thar & Scorpio-N) and improved price realization. 

Power Grid Corp of India’s share price has surged by 19.1% in the last 30 days, while its operating profit grew by 3.2% YoY in Q3FY24. This utilities company’s operating profit margin increased by 57 bps YoY to 88.4% on the back of reduced finance costs and lower provisions for depreciation and interest payments. 

You can find more screeners here.