Brokerage firm Motilal Oswal Financial Services believes that India Inc.'s profitability moderated in the December quarter of the financial year 2022-23 (Q3FY23) due to higher commodity prices even as financial and auto companies performed better during the quarter.
"India Inc.’s profitability moderated in 3QFY23. Corporate earnings were below our expectations during the quarter dragged by commodities while financials and auto held the fort. The broad-based slowdown in consumption, both staples and discretionary, also hit corporate earnings," said Motilal Oswal.
The brokerage firm said that the earnings of its coverage universe companies grew marginally by 1 percent year-on-year (YoY) (against the estimates of 8 percent YoY) in 3QFY23 while for Nifty, earnings growth stood at 11 percent YoY (against the estimates of 14% YoY).
As per the brokerage firm, the aggregate performance was impaired by a sharp drag from global commodities such as metals and oil & gas, which posted a 63 percent and 19 percent YoY earnings decline, respectively.
Excluding these two sectors, the Motilal Oswal Financial Services universe and Nifty reported a solid 29 percent and 31 percent YoY earnings growth (against the expectations of 27 percent and 26 percent YoY), respectively, fueled by BFSI and autos.
Along with metals and oil & gas sectors, cement, healthcare and retail sectors, too, dragged the 3QFY23 earnings, Motilal Oswal said.
The brokerage firm highlighted that the EBITDA margin of the Motilal Oswal universe (excluding financials) contracted 280bp YoY to 14.5 percent. Gross margins for most of the sectors contracted sharply. In 3QFY23, 10 of the 13 major sectors under Motilal Oswal coverage posted a contraction in gross margin YoY.
Heavyweights, such as Reliance Industries, SBI, ITC, Tata Motors, Kotak Mahindra Bank, HUL, Maruti Suzuki, M&M, Bajaj Auto, Dr Reddy’s Lab and Britannia recorded a stronger-than-expected performance, Motilal Oswal pointed out.
"We have pruned our FY23E Nifty earnings per share (EPS) by 1 percent to ₹812 (earlier: ₹820) due to a notable earnings downgrade in metal stocks. We now expect Nifty EPS to grow 11.6 percent in FY23. Our Nifty EPS for FY24E remains largely unchanged at ₹993, as downgrades in Reliance Industries, Bharti Airtel, Tata Steel and JSW Steel are offset by upgrades in ONGC, SBI, Tata Motors, and Coal India," said Motilal Oswal.
Sectoral performance in Q3FY23
(1) Technology: Motilal Oswal believes IT firms reported in-line quarterly numbers despite the challenging macro environment and easing supply headwinds.
"After six consecutive quarters of underperformance versus tier-2, the tier-1 companies’ revenue growth has outpaced the tier-2 pack within our coverage universe," said Motilal Oswal.
(2) Banks: As per the brokerage firm, most banks reported a resilient 3QFY23 fueled by healthy loan growth, robust margin expansion, and consistent asset quality improvement.
Growth trends were broad-based, with the corporate segment, too, exhibiting a strong recovery. PSBs posted an improvement in their operating performance driven by strong 3-6 percent quarter-on-quarter (QoQ) loan growth across banks amid a sharp recovery in the corporate segment, said Motilal Oswal.
(3) Automobiles: The auto sector's volumes in 3QFY23 grew on a YoY basis across segments, except two-wheelers, Motilal Oswal said.
"Healthy volume growth was underpinned by improvement in the supply of semiconductor chips and a strong order book, especially in the case of passenger vehicles," said Motilal Oswal.
(4) Consumer: Motilal Oswal said that the overall performance of its coverage universe was mainly driven by value, as volume growth remained soft.
"During the quarter, commodity costs showed signs of stabilisation (albeit at high levels in some cases) or decline in some cases, and with the full effect of price hikes kicking in, a few companies reported gross margin expansions too," said Motilal Oswal.
Earnings upgrades and downgrades
The top earnings upgrades, as per Motilal Oswal, in FY24E include Tata Motors (19 percent), ONGC (11 percent), Bajaj Auto (6 percent), Dr Reddy’s Labs (5 percent), and Coal India (4 percent) whereas the top earnings downgrades in FY24E include Divi’s Lab (-33 percent), Bharti Airtel (-25 percent), Eicher Motors (-11 percent), JSW Steel (-8 percent), and Tata Steel (-6 percent).
"Corporate earnings for 3QFY23 were below our expectations led by a weak demand environment and macro headwinds, with financials and autos holding the fort once again. The slowdown in consumption is a material concern if trends don’t reverse immediately," Motilal Oswal said.
"Markets are trading flat year-to-date and valuations are in the fair value zone with Nifty trading at nearly 18 times FY24E EPS and thus offering room for modest upside if corporate earnings do not see material downgrades ahead. We prefer BFSI, IT, industrials, auto and cement while we are underweight on energy in our model portfolio," it added.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.