Published on 17/08/2022 10:05:42 AM | Source: Motilal Oswal Financial Services

India Strategy: A Miss Led By Oil & Gas; Healthy Internals And Spread Of Earnings By Motilal Oswal Financial Services

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BFSI leads the show, once again; Cut FY23 Nifty EPS est. by ~3%

* Corporate earnings for Nifty and MOFSL Universe were below our expectation. Miss in heavyweights such as RIL, TTMT and OMCs’ like BPCL, HPCL drove the aggregate miss. However, the spread of earnings has been decent, with 68% of the MOFSL Universe either meeting or exceeding our profit expectations. 14 out of 20 sectors have met/beaten expectations. Like in 4QFY22, profit in 1QFY23 was entirely driven by BFSI, aided by a moderation in credit cost. O&G dragged the aggregates while Consumer, Metals and Cement have beaten expectations. Metals, Healthcare, and Cement reported an earnings decline YoY, while IT earnings were flat in 1QFY23.

* The earnings downgrade/upgrade ratio for the MOFSL Universe for FY23 stands balanced as 78 companies have seen upgrades of more than 3%, while 79 companies have been downgrades of over 3%

* Profit for the MOFSL Universe grew 12% YoY (est. 20%). Excluding BFSI, profit has been flat YoY (est. 13%). Excluding Metals and O&G, profit has grown by 35% YoY (est. 40%). EBITDA margin for the MOFSL Universe (excluding Financials) contracted by 490bp YoY to 14.2%

*Profit for Nifty rose 23% YoY (est. 31%), led by BFSI. Excluding BFSI, profit grew 18% YoY (est. 28%). Heavyweights, such as RIL, TTMT, SBIN, HDFC, and BPCL posted a weaker-than-expected performance, thus weighing on the Nifty’s earnings. On a three year basis, over 1QFY20-1QFY23, MOSL/Nifty earnings have posted a 16%/20% CAGR.

* 11 companies from the MOFSL Universe posted a loss in 1QFY23. Excluding the same, profit grew 30%. Among Nifty constituents, TTMT and BPCL posted a loss. Excluding the same, profits for Nifty has grown by 31% (est. 34%).

* Of the 20 sectors that we track, eight/six/six posted a profit that was above/ inline/below our estimate. Of the 215 companies under our coverage, 100 exceeded estimates, 68 delivered a miss, and 47 were in line on the PAT front.

* BFSI accounted for the entire incremental profits YoY for the MOFSL Universe in 1QFY23. EBIDTA and PAT growth for the MOFSL Universe was the slowest since Sep'20.

* Cut our Nifty FY23 EPS estimate by 2.7%: We have cut our FY23 Nifty EPS estimate by 2.7% to INR843 (earlier: INR866) due to notable earnings downgrades in ONGC, RIL, BPCL, and TTMT. We now expect the Nifty EPS to grow by 15%/18% in FY23/ FY24.

* Key sectoral highlights: 1) Technology: 1QFY23 was marginally below our estimate, with eight out of the 13 companies reporting a PAT growth that was inline/above our estimate. Attrition inched up across the industry and remains a near-term concern. 2) Private Banks: Loan growth has been strong, propelled by a recovery in the Corporate portfolio, while growth in Retail, Business Banking, and SME segments continued to shine. 3) NBFCs: Momentum across Vehicle and Mortgages remained strong. Margin impact hasn’t reflected yet, while an improvement (or stability) in asset quality in a seasonally weak quarter was hearening. 4) Consumer: Price hikes continue to drive revenue growth as volume growth remains muted. Even as high inflation led to a tightening of consumer wallets, discretionary demand remained strong. 5) Automobiles: The quarter under review was a mixed bag, with a recovery in volumes across segments on a low base of 1QFY22, aided by an improvement in the supply of semiconductors. 6) Oil and Gas: While GRMs were very strong for OMCs, it was offset by higher losses in marketing margin. Hence, companies reported higher losses in 1QFY23. RIL’s earrings came in below our estimate, with the lower-than-estimated standalone O2C performance leading to the 10% miss each in EBITDA/PAT

The top earnings upgrades in FY23E: COAL (21%), TATA (13%), HNDL (11%), UTCEM (8%), and UPL (8%).

The top earnings downgrades in FY23E: BPCL (-70%), TTMT (-62%), ONGC (- 21%), APHS (-17%), and SRCM (-15%).

Our view: Corporate earnings in 1QFY23, were a miss after several quarters, with some heavyweights from cyclical sectors driving the aggregate miss even as spread of the earnings and accompanying corporate commentary was good. Good monsoons and a normal festive season after two years should augur well for Consumption oriented sectors. However, the growth is still lopsided and is being led by BFSI. As the benefit of the recent moderation in commodity cost starts to accrue in 2HFY23E, we expect other sectors like Consumer, Autos and Cement to contribute too. The market has bounced back smartly in the last oneand-a-half month, wiping out its entire decline YTD. The Nifty is now trading ~2% higher YTD and is strongly outperforming global markets, despite a sharp FII selling from Oct’21 to Jun’22. With this rally, the Nifty now trades at 21x FY23E EPS, comfortably above its LPA, and offers limited upside in the near term, in our view. The upside from here on will be a function of stability in global and local macros, and continued earnings delivery v/s our expectations. In our model portfolio, we maintain our OW stance on BFSI, IT, Consumer, Telecom and Auto with UW/Neutral stance on Energy/Metals/Healthcare .


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