With 31 out 50 50 firms in the Nifty50 index having already declared their earnings, domestic brokerage house Motilal Oswal (MOSL), in an interim earnings review note, said that the earnings growth in the June quarter (Q1FY23) has been subdued.
As per the brokerage, the earnings growth in the quarter under review has been led solely by the BFSI (Banking, financial services and insurance) sector, which has driven 124 percent of incremental YoY earnings growth so far, aided by credit cost moderation. Loan growth has also spiked fueled by continued momentum in Retail and SME segments, it added. Meanwhile, MOSL further pointed out that oil and gas and automobiles have been laggards while metals and cement sectors posted weak numbers as expected.
"Profits of the 31 Nifty companies rose 12 percent YoY as against MOSL's estimate of 24 percent, single-handedly driven by BFSI. Excluding BFSI, profits would have declined 1 percent YoY as against the forecast of a 16 percent rise," the brokerage said. Heavyweights, such as Reliance and Tata Motors, which posted weaker-than-expected performance, dragged the Nifty earnings, it stated. Excluding Reliance and Tata Motors, Nifty profits rose 9 percent YoY versus expectations of a 6 percent growth.
MOSL further said that it cut the Nifty EPS estimate for FY23 by 1.3 percent to ₹855 largely due to Reliance Industries and Tata Motors. FY24E EPS was also reduced by 1 percent to ₹997 from ₹1,006 earlier as upgrades in Tata Steel, Bajaj Finance, JSW Steel, and HUL were offset by downgrades in Reliance Industries and Tata Motors, it stated.
Going ahead, the brokerage feels that as the benefit of the recent moderation in commodity costs starts accruing in the second half of FY23, it expects other sectors to contribute too.
"Markets have bounced back smartly in July 2022 with Nifty50 rising 9% MoM and almost wiping out the entire 2022 YTD (calendar year) decline. Nifty is now flat for 2022 YTD and strongly outperforming the global markets despite sharp FII selling seen since October 2021-June 2022. With this rally, the Nifty now trades at 20x FY23E, which offers limited upside in the near term. We reckon the upside from here will be a function of stability in global and local macros and continued earnings delivery versus expectations," said the brokerage.
In its model portfolio, MOSL maintains an 'overweight' stance on BFSI, IT, Consumer and Auto sectors.
Sectoral summary of the Q1FY23 performance:
1) Technology: The quarter was a mixed bag for IT companies with MOSL's coverage universe reporting overall revenue growth of 1.9 percent QoQ. 7 out of 12 companies reporting an in-line/above PAT growth Tier II companies posted better growth at 3.1 percent QoQ than the 1.7 percent growth for Tier I companies, noted MOSL. Despite heightened concerns over the weakening macro environment, management of most of the companies said that they are not seeing any impact on the pipeline. A majority of the companies delivered good deal wins and highlighted a strong pipeline, it added. However, attrition inched up across the industry and remains a near-term concern.
2) Banks: MOSL noted that the growth momentum has remained strong over Q1FY23 propelled by healthy trends in the corporate portfolio, while growth in retail, business banking, and the SME segments continued to shine. Lower provisioning costs drove earnings, said the brokerage. Despite a modest but in-line 5 percent PPOP growth, the BFSI universe registered a 63 percent profit growth, stated MOSL.
3) Oil & Gas: According to MOSL, the lower-than-estimated standalone O2C (oil to chemical) performance of Reliance led to the 10 percent miss in EBITDA/PAT of the sector. Severe volatility in feedstock prices and high inflation concerns instigated the slowdown in global intermediates and polyester market, it added.
4) Consumer: Among the results declared so far, reported sales growth was largely in line with our estimates, said MOSL. Sales growth during the quarter was largely fueled by price hikes, as volumes for Staple companies continued to remain weak, ranging from low-to-mid single-digit growth, it pointed out. Continued high commodity inflation in 1QFY23 further hurt YoY gross margins, however, the discretionary category delivered robust performance due to a low base, it added.
5) Automobiles: The quarter was a mixed bag thus far, with a majority of the companies reporting in-line or above estimate operating performance, according to MOSL. Raw material costs, price hikes and operating leverage drove inline/above estimate results for 2-Wheelers, 4-Wheelers and auto components, noted the brokerage. It added that higher-than-estimated losses in Tata Motors dragged the aggregate Automobile universe performance. Ex-Tata Motors, earnings were in line.
