The June quarter (Q1FY23) earnings season begins at a time when the equity markets are engulfed with amultitude of headwinds– adverse macros, rising rates, tightening liquidity, and volatile commodity costs. FII outflows in the June quarter, too, have been the highest ever at over ₹1 lakh crore. This along with higher 10- year G-Sec yields, worsening external balance and currency depreciation poses a challenge for the market. However, the robust DII inflows and decent corporate earnings have kept the Nifty relatively resilient.
For the June quarter, domestic brokerage house Motilal Oswal (MOSL) expects net profit for its Universe (stocks under its coverage) to grow by 21 percent. It forecasts that BFSI (bank financial services and insurance), Oil & Gas, and Auto sectors will contribute around 87 percent to incremental earnings.
Excluding BFSI, the brokerage expects earnings to record a relatively modest 13 percent YoY growth while excluding OMCs (oil marketing companies) and Financials, the Universe is likely to see a 180 bps YoY decline in EBIDTA margin to 20.5 percent, it noted.
For the Nifty50 companies, the brokerage predicts a 35 percent rise in sales, a 31 percent rise in net profit and a 19 percent rise in EBITDA. Excluding RIL and ONGC, it sees the profit of the Nifty50 firms growing 13 percent YoY. Among Nifty50 firms, as well, it sees BFSI, oil and gas and auto sectors contributing 100 percent of incremental profit growth.
It also expects Nifty’s FY23 EPS to grow by 18 percent YoY and a 16 percent EPS growth in FY24.
"Recent government actions on the oil and gas front have muddied the earnings picture for the Nifty and created additional uncertainties. The benefit of the recent moderation in commodity costs will accrue only in Q2FY23 and beyond. We do see some earnings downside risks in the near-term as the delayed impact of higher and sticky inflation is leading to a pullback in consumption," the brokerage stated in its report.
It further noted that the quarterly updates from companies across sectors point towards moderate to healthy operational numbers, thus, the glass appears half-full, delicately balancing headwinds with some silver linings.
Commodity costs have corrected in the last couple of weeks, offering some respite to the adverse macros while global bond yields have also moderated by 20-50 bps from the recent highs and Nifty earnings estimates haven’t seen any worthwhile cuts, these are some key positives, it pointed out.
The brokerage further noted that in July, improved auto sales data, healthy demand for property in key markets, good monsoon progress, soft commodity prices (including crude) and strong pre-quarterly updates from Banks, Retail and Real Estate companies have helped revive the markets. Meanwhile, valuations for the Nifty have moderated to 18.7x FY23 EPS, in line with its long-period averages, it noted.
In the current environment, the brokerage prefers large caps given that midcaps continue to trade at a premium. It maintains a positive view on BFSI, Auto, Retail, QSR, Defence, and Real Estate, while selectively looking at the consumer sector.
Top ideas
Large-caps: ICICI Bank, SBI, Infosys, ITC, Reliance, Titan, Apollo Hospitals, Hindalco, Bharti Airtel, UltraTech Cement, and Maruti.
Mid-caps: Jubilant FoodWorks, Macrotech Developers, VRL Logistics, Lemon Tree, MMFS, Ashok Leyland, Angel One, and Clean Science.
Sectoral trend
Banks: According to the brokerage, its Private Banks Universe should report a 40 percent YoY growth in net profit ad loan growth is projected to remain strong. It forecasts loans by Private Banks to grow by 18 percent and 19 percent in FY23 and FY24, respectively. Meanwhile, earnings for PSU Banks are likely to remain muted, impacted by a weak treasury performance on account of higher G-Sec yields, it noted. MOSL sees PSU Banks delivering an NII growth of 13 percent, however, their PPOP (Pre-provision operating profit) is likely to decline 9 percent YoY in Q1FY23. Net profit of public sector lenders is projected to grow by 6 percent YoY, it added.
NBFC: As per MOSL, its NBFC Coverage Universe is likely to report net profit growth of 130 percent YoY. It forecasts strong YoY growth in earnings for Shriram Transport, Bajaj Finance, and LIC Housing, while we estimate a decline in earnings for Manappuram Finance.
Metals: The Metals Universe should report revenue growth of 21 percent YoY, but an EBITDA/PAT decline of 13 percent/19 percent, led by a sharp jump in input costs, noted MOSL. Sequentially, EBITDA and PAT are expected to decline by 23 percent and 27 percent, respectively, it added.
Consumer: The brokerage said that it's Consumer Universe will benefit from a low base too, and is expected to report strong YoY growth numbers – revenue: 23 percent, EBITDA: 25 percent, and PAT: 30 percent. Sales growth in Q1FY23 will largely be led by price hikes as volumes for most categories remain impacted, led by grammage reduction, higher CPI inflation, and a sustained slowdown in rural demand, it explained.
Auto: The Auto Universe is likely to report a 7.7 times YoY growth in profit (down 30 percent QoQ), aided by a decimated base, predicts MOSL. Excluding Tata Motors, the remaining firms are likely to report a 46 percent growth. It estimates a loss of ₹1800 crore in Tata Motors in Q1FY23 versus ₹4,500 loss in Q1FY22. The brokerage further added after the last three quarters of a YoY decline in EBITDA margin, it expects a YoY improvement in the margin as volumes in Q1FY23 recovered across segments supported by an improvement in semiconductor supplies.
Oil and Gas: As per MOSL, the O&G Universe is expected to report sales growth of 81 percent while their EBITDA and PAT are expected to rise 16 percent and 17 percent, respectively. However, excluding OMCs, PAT is expected to grow by 132 percent YoY due to higher refining margins for refiners and greater realization for upstream companies, it pointed out.
