Amid a volatile global macro backdrop, September quarter (Q2FY23) corporate earnings provided some support. As per an earnings review report by domestic brokerage house Motilal Oswal (MOSL), the Q2 earnings were above expectations, driven by continued strong performance of Financials and lesser-than-estimated losses in the OMC’s.
Earnings growth for the Nifty50 index came in at 9 percent in the September quarter (v/s expectations of flattish a), noted the brokerage.
"The aggregate performance was marred by a sharp drag from global commodities such as Metals and O&G, which posted a 67 percent and 29 percent YoY earnings decline, respectively. Excluding these, the Nifty posted a solid 33 percent earnings growth versus expectations of 28 percent, fueled by BFSI and Autos. Along with Metals and O&G, Cement and Healthcare sectors too dragged Q2FY23 earnings," it informed.
Excluding BFSI, profits would have declined 22 percent YoY for MOSL Coverage, stated the report.
Post the September quarter earnings, the brokerage raised its FY23E Nifty EPS by 2.5 percent to ₹837 (earlier: ₹817) due to notable earnings upgrades in SBI, Axis Bank and Coal India. It now expects the Nifty EPS to grow 14 percent/19 percent in FY23/ FY24.
In its coverage Universe, the earnings upgrade to downgrade ratio for FY23E turned adverse as 67 companies saw earnings upgrades of >3, while 92 companies’ earnings were downgraded by >3 percent, it further revealed.
The top earnings upgrades in FY23E by the brokerage include: Coal India (27 percent), Axis Bank (17 percent), SBI (13 percent), Hindalco (13 percent) and Britannia (11 percent).
The top earnings downgrades in FY23E: Tata Motors (Profit to Loss), Divi’s Labs (-19 percent), Asian Paints (-18 percent), Reliance Industries (-6 percent), and Wipro (-6 percent).
The brokerage further pointed out that the beat/miss ratio for the MOSL Coverage Universe, however, was largely balanced as 38 percent of the companies beat estimates, while 34 percent missed our estimates at the PAT level. However, at the EBITDA level, the ratio was unfavorable – 26 percent of the companies reported a beat while 38 percent reported a miss, it added.
"Further, the EBITDA margin of the MOFSL Universe (excluding Financials) contracted 540 bps YoY to 12.8 percent. Gross margins for most sectors contracted sharply. In Q2FY23, eight of the 13 major sectors under MOFL’s coverage reported a contraction in gross margin YoY," it said.
Profit for Nifty rose 9 percent YoY (est. flat growth) fueled by BFSI. Excluding BFSI, profit fell 3 percent YoY (est. 11 percent decline), the report revealed.
Heavyweights, such as SBI, Axis Bank, ITC, Kotak Mahindra Bank, ONGC, Sun Pharma, and Bharti Airtel recorded a stronger-than-expected performance, thus leading to the beat, it said.
On a three-year basis (Q2FY20 -Q2FY23), Nifty’s earnings posted an 19 percent CAGR, it added.
Meanwhile, of the 223 companies under MOSL's coverage, 85 exceeded estimates, 76 recorded a miss, and 62 were in line on the PAT front.
Sector Report card
Of the 20 sectors under MOSL's coverage, four reported above estimates profit, eight were in line and eight were below estimates.
Technology: The brokerage said that it was an in-line quarter for IT companies despite the challenging macro environment and continued supply headwinds. MOSL's coverage universe reported overall revenue growth of 2 percent QoQ. Tier II companies posted better growth at 3.7 percent QoQ v/s 1.8 percent growth for Tier I companies, it added.
Banks: Growth momentum has remained strong over 2QFY23 propelled by healthy loan growth, margin expansions and continued moderation in provisions, said the brokerage.
Consumer: As per MOSL, the overall performance was majorly driven by value as volumes remained subdued on a higher base. While commodity costs have shown signs of stabilization, many of them still remain at high levels. Gross margin pressure was higher than expected in Q2FY23, it added.
Oil and Gas: OMC’s fared better than expected thanks to the relief from the government, however, City Gas Distribution (CGD) comapnies disappointed, noted MOSL. Implied marketing losses (including inventory) for OMCs recovered to an average of - ₹0.7/liter owing to lower Brent prices even as OMCs did not exercise any price hikes during the quarter, said the brokerage.
Outlook and top picks
"Corporate earnings for Q2FY23 were better than our expectations, despite several headwinds, with Financials driving the quarter once again. The spread of earnings has been decent with 66 percent of our Universe either meeting or exceeding profit expectations. Markets have bounced back smartly and wiped out the entire YTD’CY22 decline. The Nifty is now up 6 percent YTD’CY22. With this rally, Nifty now trades at 22x FY23E, comfortably above the LPA and offers limited upside in the near term, in our view," said the brokerage.
It reckons the upside from hereon will be a function of stability in global and local macros and earnings delivery. In its model portfolio, it is overweight on BFSI, Auto, Consumer and IT and underweight on Energy, Pharma and Utilities.
Top largecap stocks picks by the brokerage post the September quarter earnings include RIL, Infosys, ICICI Bank, SBI, Bharti Airtel, ITC, Maruti Suzuki, Titan, UltraTech Cement, Coal India, IndusInd Bank, Apollo Hospitals and Macrotech Developers.
Meanwhile, top mid and smallcap stock picks include Varun Beverages, Ashok Leyland, Jubilant Food, IDFC First Bnak, Vinati Organics, Metro Brands, Angel One, CAMS Services, and Lemon Tree Hotels.