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A tale of mixed fortunes: Domestic cyclicals drive earnings; Global cyclicals drag

*  As of 1st Nov’22, 98/32 companies within the MOFSL Universe/Nifty have announced their 2Q results. The companies that have reported their earnings so far comprise: a) 73% of estimated PAT for the MOFSL and Nifty Universe, b) 53% of India's market capitalization, and c) 79% weightage in the Nifty.

* The 2QFY23 earnings growth of the aforementioned 98 MOFSL Universe companies declined 7% YoY (est. 11% decline YoY). The aggregate performance was adversely impacted by a sharp drag from global commodities. Excluding Metals and O&G, the MOFSL Universe and Nifty posted a solid 26% and 25% earnings growth, vs. expectations of 24% and 20%, respectively, fueled by BFSI and Autos. Along with Metals and O&G, the Cement sector also dragged 2QFY23 earnings.

* Excluding BFSI, profits would have declined 25% YoY (v/s est. -28%). Until now, 31 companies each within our coverage universe witnessed an upgrade/ downgrade of more than 3% each, respectively, leading to a balanced upgradeto-downgrade ratio for FY23E. However, EBITDA margin of the MOFSL Universe (excluding Financials) contracted 610bp YoY to 14.5%.

* Profits of the 32 Nifty companies that declared results so far dipped 2% YoY (est. -2.5% YoY), led by global cyclicals. Excluding these, profits would have grown 25% YoY (v/s est. 20% YoY). Excluding BFSI, Nifty profits would have decreased 14% YoY (v/s est. -13%). Five companies in Nifty reported profits below our expectation, while 15 reported beat in earnings.

* FY23E/FY24E Nifty EPS has seen an upgrade of 0.5%/0.4%, respectively: Nifty EPS for FY23E has been increased by 0.5% to INR821 (from INR817 earlier) driven by Axis Bank, Sun Pharma, HCL Tech and ICICI Bank. FY24E EPS was also raised by 0.4% to INR989 (from INR984 earlier).

* Summary of the 2QFY23 performance thus far:

1) Technology: Better-thanexpected 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 vs. 1.8% growth for Tier I companies.

2) Banks: Growth momentum has remained strong over 2QFY23 propelled by a pick-up in the corporate segment (primarily working capital loans), while growth in retail, business banking, and the SME segments continued to remain healthy.

3) Automobiles: The initial flush of results was encouraging from an OEM perspective, though Auto Ancillaries’ results were a mixed bag. OEMs’ performance was largely in line/above est., driven by strong volume growth, favorable commodity and currency

4) Consumer: At a topline level from a sectoral perspective, what is evident from the results so far is that urban and discretionary demand is holding up well but rural demand remains weak with no clear recovery in sight over the next few months.

5) Oil & Gas: The sector so far has bagged mixed results with IGL and MRPL posting results below our estimates. Reliance performed in line with our estimate as better-than-anticipated performance in Retail segment was offset by relatively weak Standalone performance. (refer to page 8 for the detailed 2QFY23 sectoral trends).

Key 2QFY23 result highlights

* As of 1st Nov’22, 32 Nifty stocks reported a sales/EBITDA/PBT/PAT growth of 24%/6%/2%/-2% YoY (v/s est. 15%/2%/1%/-3%), respectively. Of these, 15/5 companies surpassed/missed our PAT estimates, respectively; on the EBITDA front, 12/3 of these companies exceeded/missed our estimates, respectively.

* For the 98 companies within our MOFSL Universe, sales/EBITDA/PBT/PAT growth stood at 28%/-1%/-5%/-7% YoY (v/s est. 20%/-5%/-8%/-11%), respectively. Excluding Metals and O&G, the companies within MOFSL Universe recorded a Sales/EBITDA/PBT/PAT growth of 20%/15%/25%/26% YoY (v/s est. 20%/14%/ 25%/24%), respectively.

* Among the Nifty constituents, Bharti Airtel, Dr Reddy’s Labs, Ultratech Cement, Axis Bank, Sun Pharma, UPL, SBI Life Insurance, Maruti Suzuki, Tech Mahindra, Kotak Mahindra Bank, ITC, Nestle, and Bajaj Auto exceeded our profit estimates. Conversely, JSW Steel, Asian Paints, Tata Steel, Tata Consumer, and Wipro missed our profit estimates.

* Within the MOFSL Universe, PSU Banks/Cement/NBFCs/ Private Banks recorded an FY23E earnings upgrade of 12%/5%/3%/3%, respectively. Conversely, Chemicals-Specialty, Real Estate, Telecom, and Metals witnessed an earnings downgrade.

* View: The 2QFY23 corporate earnings so far have been in line with performance of heavyweights, such as RIL, HDFC Bank, TCS, ICICI Bank and Infosys, driving an in-line aggregate. The spread of earnings has been decent with 70% of our universe either meeting or exceeding profit expectations. However, the growth is being led by just BFSI and Autos with IT reporting single-digit (7% YoY) earnings growth while Metals, Oil & Gas and Cement recorded a YoY earnings decline for the quarter. As the benefits of the recent moderation in commodity costs start accruing in 2HFY23E, we expect other sectors to contribute too. Markets have bounced back smartly in Oct’22 with Nifty-50 rising 5.4% MoM and almost wiping out the entire YTD’CY22 decline. The Nifty-50 is now up ~4% 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 here will be a function of stability in global and local macros and continued earnings delivery v/s expectations. 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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