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Financials, O&G, and Autos to drive 1QFY23 earnings; FY23 estimates stable

*  As we usher in the first earnings season of FY23, the market is at a crossroads. Despite a multitude of headwinds – adverse macros, rising rates, tightening liquidity, and volatile commodity costs, the Nifty has outperformed global markets YTD. FII outflows in 1QFY23 have been the highest ever at USD15b. This, coupled with higher 10-year G-Sec yields, a worsening external balance, and consequent currency depreciation provided a very challenging backdrop to the equity market. However, robust domestic equity inflows (DII inflows stood at USD15.2b in 1QFY23) and decent corporate earnings have kept the Indian market relatively resilient. As we look ahead, we note that commodity costs have corrected in the last couple of weeks, offering some respite to the adverse macros. Global bond yields have moderated by 20-50bp from the recent highs and earnings estimates for the Nifty haven’t seen any worthwhile cuts. Meanwhile, valuations for the Nifty have moderated to 18.7x FY23 EPS, in line with its long period averages. Thus, the glass appears half-full to us, delicately balancing the headwinds with some silver linings.

* After two healthy years (15%/36% in FY21/FY22) of earnings growth, despite the COVID-19 pandemic, we are building in an 18% growth for the Nifty in FY23, led by BFSI, O&G, and Autos. Recent government actions on the O&G 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 2QFY23 and beyond. We do see some earnings downside risks in the near-term as the delayed impact of higher and sticky inflation manifests itself in a pullback in consumption.

* On the macroeconomic front, GST collections in 1QFY23 have been robust at INR4.5t, up 37% YoY. Systemic credit growth (of ~12%) is showing signs of a revival after many years. Services PMI, at 59.2 in Jun’22, was at an 11-year high. Core sector growth came in robust too, even adjusted for the COVID-19 base. The quarterly updates from companies across sectors point towards moderate to healthy operational numbers. While major Banks and NBFCs (HDFCB, IIB, BAF, AUBANK, HDFC, FB, MMFS, etc.) reported a healthy momentum in loan growth, Auto volumes recovered across segments, on a low base of 1QFY22, supported by some improvement in semiconductor supplies. Discretionary Consumer players such as TTAN witnessed strong demand in 1QFY23, while DMART posted weak LTL numbers.

* We expect a 1QFY23 earnings growth of 21% YoY for our MOFSL Universe. The key drivers of this 1QFY23 performance are:

a) BFSI – We expect Private Banks to report a PPOP/PAT growth of ~8%/40% YoY in 1QFY23. Earnings for PSBs will remain muted. NBFCs will see a steady quarter, despite seasonality.

b) O&G – We expect our coverage universe to report a PAT growth of 17% YoY. Excluding OMCs, it will be up 132% YoY, due to higher refining margins.

c) Autos – After the last three quarters of a YoY decline in EBITDA margin, we expect a YoY improvement in margins and a 7.7x expansion in profit on a low base.

d) Consumer – We expect strong cumulative growth numbers for our Coverage Universe: revenue: 23%, EBITDA: 25%, and PAT: 30%.

e) Metals – We expect our Coverage Universe to report a revenue growth of 21% YoY, but an EBITDA/PAT decline of 13%/19%, led by a sharp jump in input costs.

f) Cement – We expect EBITDA/profit for our Coverage Universe (excluding GRASIM) to drop by 24%/ 27% YoY, while OPM should decline by 9.8pp YoY to 16.3%. g) Healthcare – We expect the decelerating trend in our Coverage Universe to continue, with a third consecutive quarter of a YoY decline in earnings.

* Nifty/MOFSL Universe to register 31%/21% YoY profit growth in 1QFY23E: We expect PBT/PAT for our MOFSL Universe to grow by 21%/21% in 1QFY23. BFSI, Oil and Gas, and Automobiles are likely to contribute 87% to incremental earnings in 1QFY23E. Excluding BFSI, we expect 1QFY23 earnings for the MOFSL Universe to record a relatively modest 13% YoY growth. Excluding OMCs and Financials, the MOFSL Universe is likely to see an 180bp YoY decline in EBIDTA margin to 20.5%. Sales/EBITDA/PBT/PAT for Nifty should grow by 35%/19%/ 29%/31% YoY in 1QFY23E. Excluding RIL and ONGC, we expect profit to grow by 13% YoY for Nifty constituents. These two companies contribute 65% to Nifty’s incremental earnings. Two-year earnings (1QFY21-1QFY23) CAGR for the MOSL Universe/Nifty is expected to stand at 69%/63%.

* Minor tweak to our Nifty FY23E/FY24E EPS: Our Nifty FY23/FY24 EPS estimate has seen a minor tweaking to INR866/INR1,006 (prior: INR864/NR1,002). The 21%/10% cut in our FY23 earnings estimate for Metals/Cement is compensated by a 9% increase in our O&G estimate. If not for the recent imposition of windfall tax and export duty in the O&G sector, there might have been an earnings upgrade in our FY23 EPS. Among Nifty constituents, the cut in our earnings estimates for HNDL, JSTL, TATA, and BPCL has been compensated by an upgrade in just RIL’s estimates for FY23. We expect Nifty’s FY23 EPS to grow by 18% YoY on a base of 36% growth in FY22. BFSI, Auto, and O&G will contribute over 100% of incremental profit growth among Nifty constituents in FY23. We estimate a Nifty EPS growth of 16% in FY24. Over FY20-23, Nifty EPS, at our current estimate, should compound at 24% CAGR, with underlying profit expanding to INR7t in FY23 from INR3.5t in FY20.

* Key model portfolio changes: We maintain our OW stance on BFSI, IT, and Consumer. We are raising Auto to OW, given the healthy demand, moderating commodity costs, and improving supply scenario. We are adding MSIL and MOTHERSO back to our model portfolio. MSIL’s fortunes are changing, with a revival in the product lifecycle (driving market share), easing of commodity-related headwinds, and a favorable forex (both driving margin). MOTHERSO’s fortunes are linked to an improvement in semiconductor supplies (which is underway) and the sharing of energy cost inflation with OEMs (negotiations are on). MOTHERSO is our preferred global play, considering the favorable risk-reward. We raise our weightage in Consumer and reintroduce ITC, which we upgraded to Buy recently after maintaining our Neutral stance for the last five years. ITC is expected to post a 14% earnings CAGR over FY22-24 v/s 5% over FY17-22. It is trading at reasonable valuations (21x FY23E EPS) and at a higher dividend yield (4%). In Financials, we are further raising our weights in ICICI Bank, given the attractive valuations. We are adding SBI Life to our model portfolio. SBILIFE is seeing strong traction in premium growth across segments. We estimate 24% VNB CAGR over FY22-24, with operating RoEV sustaining at ~21% by FY24. We are also adding MMFS to the portfolio. We expect MMFS to benefit from higher expected volumes for MM, particularly in the UV segment, which has always been the former’s strength. The company has effected multiple changes at the operational level, which will help usher stability in asset quality and reduce volatility in credit costs.

* In Midcaps, we are replacing TCI with VRL. The latter is one of the largest fleet owners with a focus on the high margin Less than Truckload (LTL) segment and generates industry-leading margin through efficient operations. We are introducing CLEAN to our model portfolio. We expect earnings to double over FY22-24, with RoE in the 35% band. After the 45% correction from recent highs, the risk-reward looks slightly better.

Top picks

*  Largecaps: ICICI Bank, SBI, Infosys, ITC, Reliance, Titan, Apollo Hospitals, Hindalco, Bharti Airtel, UltraTech Cement, and Maruti.

*  Midcaps: Jubilant FoodWorks, Macrotech Developers, VRL Logistics, Lemon Tree, MMFS, Ashok Leyland, Angel One, and Clean Science.

Key sectoral trends and highlights

* The Private Banks Universe should report an 8%/42%/40% YoY growth in PPOP/PBT/PAT. Loan growth is projected to remain strong. We forecast loans by Private Banks to grow by 18%/19% YoY in FY23/FY24.

* Our NBFC Coverage Universe is likely to report a PBT/PAT growth of 107%/130% YoY. We forecast a strong YoY growth in earnings for SHTF, BAF, and LICHF, while we estimate a decline in earnings for MGFL.

* PSU Banks are likely to deliver a NII/PPOP growth/decline of 13%/9% YoY. PAT is projected to grow by 6% YoY. Earnings for PSBs are likely to remain muted, impacted by a weak treasury performance on account of higher G-Sec yields.

* The O&G Universe is expected to report sales/EBITDA/PAT growth of 81%/16%/ 17% YoY. Excluding OMCs, PAT is expected to grow by 132% YoY due to higher refining margins for refiners and greater realization for upstream companies. Brent crude oil has averaged USD114/bbl (up 65% YoY) in 1QFY23. Singapore (SG) GRM is trailing very strongly, led by an improvement in petrol and diesel cracks.

* The MOFSL Auto Universe is likely to report a 7.7x YoY growth in profit (down 30% QoQ), aided by a decimated base. Excluding TTMT, the same will report a 46% growth. We are expecting a loss of INR18b in TTMT as compared to an INR45b loss in 1QFY22. After the last three quarters of a YoY decline in EBITDA margin, we estimate a YoY improvement in margin. Volumes in 1QFY23 recovered across segments on a low base of 1QFY22, supported by an improvement in semiconductor supplies.

* The MOFSL Technology Universe should witness modest median revenue growth in 1QFY23E (up 3.3% QoQ in CC terms and 14.3% YoY). Growth in EBIT/ PAT (down 1%/2.8% QoQ) should be impacted by wage hikes and supply-side pressures, despite a depreciation in the INR against the USD.

* Our Consumer Universe will benefit from a low base too, and is expected to report strong YoY growth numbers – revenue: 23%, EBITDA: 25%, and PAT: 30%. Sales growth in 1QFY23 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.

* The Metals Universe should report a revenue growth of 21% YoY, but an EBITDA/PAT decline of 13%/19%, led by a sharp jump in input costs. Sequentially, EBITDA and PAT is expected to decline by 23%/27%.

* Earnings for our Healthcare universe is expected to decelerate further, with a third consecutive quarter of a YoY decline.

* The MOFSL Cement Universe should report an EBITDA/PBT/PAT decline of 18%/21%/20%. Aggregate EBITDA margin is likely to contract by 890bp YoY to 16.5%. Excluding GRASIM, the Cement universe will witness an even steeper contraction. EBITDA/PAT is expected to decline by 24%/27% YoY.

* The Telecom Universe should report a loss for the 20^th consecutive quarter, largely led by IDEA. We project a sequential ARPU improvement of ~3% for all three telcos, aided by tariff hike benefits.

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