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Earnings review – 3QFY23: Modest quarter; dragged by global cyclicals

BFSI in the vanguard once again; Auto reviving but consumption slowdown a worry

* Corporate earnings moderate: 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. Broad-based slowdown in Consumption, both Staples and Discretionary, also hit corporate earnings.

* Global Cyclicals continue to weigh down the aggregates: Earnings of the MOFSL Universe companies grew marginally by 1% YoY (est. +8% YoY) in 3QFY23 while for Nifty, earnings growth stood at 11% YoY (v/s est. of +14% YoY). The aggregate performance was impaired by a sharp drag from global commodities such as Metals and O&G, which posted a 63% and 19% YoY earnings decline, respectively. Excluding these, the MOFSL Universe and Nifty reported a solid 29% and 31% YoY earnings growth (v/s expectations of +27% and +26% YoY), respectively, fueled by BFSI and Autos. Along with Metals and O&G sectors, Cement, Healthcare and Retail sectors too dragged the 3QFY23 earnings. * BFSI on the forefront again: Excluding BFSI, profits declined 14% YoY (v/s est. decline of 3%) for MOFSL Coverage. For our Coverage Universe, the earnings upgrade to downgrade ratio turned adverse for FY24E as 47 companies saw earnings upgrades of >3%, while 92 companies’ earnings were downgraded by >3%.

* The beat-miss dynamics: The beat-miss ratio for the MOFSL Coverage Universe was unfavorable as 37% of the companies beat our estimates, while 43% missed our estimates at the PAT level. Further, EBITDA margin of the MOFSL Universe (excluding Financials) contracted 280bp YoY to 14.5%. Gross margins for most of the sectors contracted sharply. In 3QFY23, 10 of the 13 major sectors under MOFSL Coverage posted a contraction in gross margin YoY.

* Heavyweights deliver: Profit for Nifty rose 11% YoY (est. +14% YoY) fueled by BFSI and Auto. Excluding BFSI, profit remained flat (est. 6% growth). 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. On a three-year basis (3QFY20-3QFY23), MOFSL/Nifty’s earnings posted a 20%/19% CAGR, respectively.

* Report card: Of the 21 sectors under our coverage, four/nine/eight sectors reported profits above/in-line/below our estimates, respectively. Of the 222 companies under our Coverage, 83 exceeded estimates, 96 recorded a miss, and 43 were in line on the PAT front.

* The 9MFY23 snapshot: Nifty/MOFSL Universe posted 14%/1% earnings growth, respectively, in 9MFY23. Excluding Metals and O&G, Nifty and MOFSL Universe reported 29% and 28% YoY earnings growth, respectively.

* Nifty EPS cut for FY23E; unchanged for FY24E: We have pruned our FY23E Nifty EPS by 1% to INR812 (earlier: INR820) due to notable earnings downgrade in the Metals stocks. We now expect Nifty EPS to grow 11.6% in FY23. Our Nifty EPS for FY24E remains largely unchanged at INR993 , as downgrades in Reliance Industries, Bharti Airtel, Tata Steel and JSW Steel are offset by upgrades in ONGC, SBI, Tata Motors, and Coal India

Key sectoral highlights –

1) Technology: in-line quarter for IT companies despite the challenging macro environment and easing supply headwinds. After six consecutive quarters of underperformance v/s tier-2, the tier-1 companies’ revenue growth has outpaced the tier-2 pack within our Coverage Universe.

2) 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% QoQ loan growth across banks amid a sharp recovery in the Corporate segment.

3) Automobiles: volumes in 3QFY23 grew YoY across segments, except 2Ws. Healthy volume growth was underpinned by improvement in the supply of semiconductor chips and strong order book, especially in case of PVs.

4) Consumer: The overall performance of our Coverage Universe was mainly driven by value, as volume growth remained soft. During the quarter, commodity costs showed signs of stabilization (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.

* The top earnings upgrades in FY24E: Tata Motors (19%), ONGC (11%), Bajaj Auto (6%), Dr Reddy’s Labs (5%), and Coal India (4%).

* The top earnings downgrades in FY24E: Divi’s Lab (-33%), Bharti Airtel (-25%), Eicher Motors (-11%), JSW Steel (-8%), and Tata Steel (-6%).

* Our view: Corporate earnings for 3QFY23 were below our expectations led by weak demand environment and macro headwinds, with Financials and Autos holding the fort once again. Slowdown in Consumption is a material concern if trends don’t reverse immediately. Markets are trading flat YTD and valuations are in the fair value zone with Nifty trading at ~18x 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 UW on Energy in our model portfolio.

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