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Earnings review – 2QFY23: Marginal beat in a tough backdrop

* Corporate earnings – a savior: Amid a volatile global macro backdrop, India Inc. provided a succor. Corporate earnings for 2QFY23 were above MOFSL expectations, driven by continued strong performance of Financials and lesserthan-estimated losses in OMC’s. Excluding OMC’s, MOFSL aggregates were in line.

* Global Cyclicals play a spoilsport: Earnings growth of the MOFSL Universe companies for 2QFY23 declined 5% YoY (est. 16% YoY decline) while for Nifty, it stood at 9% (v/s expectations of flattish earnings). The aggregate performance was marred by a sharp drag from global commodities such as Metals and O&G, which posted a 67% and 29% YoY earnings decline, respectively. Excluding these, the MOFSL Universe and Nifty posted a solid 30% and 33% earnings growth (v/s expectations of 30% and 28%), respectively, fueled by BFSI and Autos. Along with Metals and O&G, Cement and Healthcare sectors too dragged 2QFY23 earnings.

* BFSI drives the quarter: Excluding BFSI, profits would have declined 22% YoY (v/s est. -34%) for MOFSL Coverage. For our 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%.

* The beat-miss dynamics: The beat/miss ratio for the MOFSL Coverage Universe was largely balanced as 38% of the companies beat our estimates, while 34% missed our estimates at the PAT level. However, at the EBITDA level, the ratio was unfavorable – 26% of the companies reported a beat while 38% reported a miss. Further, EBITDA margin of the MOFSL Universe (excluding Financials) contracted 540bp YoY to 12.8%. Gross margins for most sectors contracted sharply. In 2QFY23, eight of the 13 major sectors under MOFSL’s coverage reported a contraction in gross margin YoY.

* Heavyweights deliver: Profit for Nifty rose 9% YoY (est. flat growth) fueled by BFSI. Excluding BFSI, profit fell 3% YoY (est. 11% decline). 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. On a three-year basis (2QFY20 -2QFY23), MOFSL/Nifty’s earnings posted an 18%/19% CAGR, respectively.

* Report card: Of the 20 sectors under our coverage, four/eight/eight sectors reported profits that were above/in-line/below our estimates, respectively. Of the 223 companies under our coverage, 85 exceeded estimates, 76 recorded a miss, and 62 were in line on the PAT front.

* 1HFY23 snapshot: Nifty and MOFSL Universe posted 15% and 3% earnings growth, respectively, in 1HFY23. Excluding Metals and O&G, Nifty and MOFSL Universe posted 28% and 32% YoY earnings growth, respectively.

* Raise our Nifty FY23E EPS by 2.5%: We have raised our FY23E Nifty EPS by 2.5% to INR837 (earlier: INR817) due to notable earnings upgrades in SBI, Axis Bank and Coal India. We now expect the Nifty EPS to grow 14%/19% in FY23/ FY24.

* Key sectoral highlights: 1) Technology: In-line quarter for IT companies despite the challenging macro environment and continued supply headwinds. Our coverage universe reported an overall revenue growth of 2% QoQ. Tier II companies posted better growth at 3.7% QoQ v/s 1.8% growth for Tier I companies. 2) Banks: Growth momentum has remained strong over 2QFY23 propelled by healthy loan growth, margin expansions and continued moderation in provisions. 3) Consumer: 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 remains at high levels. Gross margin pressure was higher than expected in 2QFY23. 4) O&G: OMC’s fared better than expected thanks to the relief from government; CGDs disappointed. Implied marketing losses (including inventory) for OMCs recovered to an average of -INR0.7/liter owing to lower Brent prices even as OMCs did not exercise any prices hikes during the quarter.

* The top earnings upgrades in FY23E: Coal India (27%), Axis Bank (17%), SBI (13%), Hindalco (13%) and Britannia (11%).

* The top earnings downgrades in FY23E: Tata Motors (Profit to Loss), Divi’s (-19%), Asian Paints (-18%), Reliance Industries (-6%), and Wipro (-6%).

* Our view: Corporate earnings for 2QFY23 were better than our expectations, despite several headwinds, with Financials driving the quarter once again. The spread of earnings has been decent with 66% 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% 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. We reckon the upside from hereon will be a function of stability in global and local macros and earnings delivery. In our model portfolio, we maintain our OW stance on BFSI, AUTO, Consumer & IT and UW stance on Energy, Pharma and Utilities.

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