Financials and auto drive Q4 earnings, says MOSL; here are its top upgrades and downgrades this quarter

Amid a challenging global macro backdrop, India Inc.’s profitability remained healthy in the March quarter (Q4FY23) – in line with expectations, brokerage house Motilal Oswal (MOSL) said in an earnings review note. MOSL's coverage universe reported the highest earnings growth in the last four quarters driven by financials and auto, while metals dragged aggregate profitability.

Despite healthy earnings, the brokerage pointed out that it was lopsided for both MOSL Universe and Nifty mainly led by a few heavyweights only. Five companies within MOSL Universe- SBI, Tata Motors, BPCL, IOC, and Reliance Industries contributed 83 percent of the incremental YoY accretion in earnings, revealed the brokerage. Similarly, within Nifty, five companies - SBI, Tata Motors, BPCL, Reliance Industries, and Axis Bank contributed 96 percent of the incremental YoY accretion in earnings, it added.

"Earnings though remain lopsided with BFSI (bank, financial services, and insurance) driving almost entire incremental earnings in FY23. With healthy macros, range-bound oil prices, robust fiscal balance sheet, and moderating inflation, the backdrop for the market is quite optimistic," said the brokerage.

Post the earnings, the brokerage has retained its overweight stance on financials, capex, autos, and consumption. Meanwhile, it is neutral on IT and healthcare and underweight on metals, energy, and utilities in its model portfolio.

Upgrades and downgrades

The brokerage informed that the beat-miss ratio for the MOSL Universe was favorable as 45 percent of the companies beat estimates, while 36 percent missed at the PAT level. Meanwhile, the earnings upgrade to downgrade ratio for the MOSL Universe was tilted towards the downgrades for FY24E with 64 companies reporting earnings upgrades of over 3 percent, and 72 companies’ earnings were downgraded by over 3 percent, highlighted MOSL.

MOSL's top earnings upgrades for FY24E include Tata Motors (13 percent), Bharti Airtel (8 percent), Bajaj Auto (7.3 percent), Divi’s Lab (7 percent), and Hero MotoCorp (5 percent).

Meanwhile, MOSL's top earnings downgrade in FY24E include ONGC (-16 percent), UPL (-13 percent), Grasim Industries (-11 percent), Hindalco (-9 percent), and Coal India (-8 percent).

The brokerage also informed that Nifty EPS for FY23 was reduced by 0.6 percent to ₹807 (earlier: ₹812) largely due to notable downgrades in ONGC, Coal India, and BPCL. FY24E EPS also saw a cut of 0.6 percent to ₹972 (earlier: ₹978) due to downgrades in ONGC, BPCL, and Infosys, it added.

Earnings highlight

As per the report, earnings growth of the MOSL Coverage Universe jumped to a four-quarter high of 15 percent YoY (estimate of +14 percent YoY) in Q4FY23, while Nifty’s earnings growth came in at 16 percent YoY (estimate of +14 percent YoY).

This aggregate performance was fueled by BFSI and auto sectors that posted a 43 percent and 115 percent YoY earnings growth, respectively.

Conversely, the weaker-than-expected earnings performance of metals, down 45 percent YoY (PAT of all companies within MOSL coverage declined YoY with Tata Steel’s profit plunging 83 percent YoY), dragged overall growth, observed the brokerage, adding the earnings growth for the oil & gas sector also decreased 20 percent YoY.

It further noted that excluding metals and oil & gas, the MOSL Universe and Nifty posted a 34 percent and 30 percent YoY earnings growth, respectively versus expectations of 29 percent and 23 percent growth, respectively. Along with metals, the cement, healthcare and retail sectors too dragged Q4FY23 earnings, it added. Excluding BFSI, profits grew 4 percent YoY (est. of +5 percent) for the MOSL Universe, highlighted the brokerage.

Sectoral highlights

1) Technology: IT companies reported a mixed performance overall in 4QFY23, with tier-1 firms delivering muted revenue growth and modest margins, while tier-2 companies outpacing the tier-1 pack with stronger revenue growth, stated MOSL.

2) Banks: Reported a strong 4QFY23, driven by healthy loan growth, stable margins, and continued asset quality improvements. There were numerous drivers of credit expansion, with the retail and MSME sectors exhibiting robust growth and the corporate book displaying a healthy rebound, it said.

3) Automobiles: Volumes grew YoY across segments, except 2Ws, which remained flat due to a decline in exports, it noted.

4) Consumer: The overall performance was a mixed bag with some companies reporting robust volume growth, while others recording strong value growth. However, there have been encouraging developments on the margin front, noted the brokerage.

Here are MOSL's top stock picks post the March quarter earnings.