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Interim review – earnings in line; Heavyweights holding the fort

Financials lead the narrative again; Commodities continue to drag

* Amid a backdrop of mounting global headwinds with slow-down in growth, higher rates and geopolitical volatilities, all eyes are on the 3QFY23 corporate earnings season. In this note, we present our interim earnings review

* As of 2nd Feb’23, 127/35 companies within the MOFSL Universe/Nifty have announced their 3Q results. These companies constitute: a) 72% and 73% of the estimated PAT for the MOFSL and Nifty Universe, respectively, b) 51% of India's market capitalization, and c) 81% weightage in the Nifty.

* The 3QFY23 aggregate earnings of the aforesaid 127 MOFSL Universe companies have been below estimates and have risen only 7% YoY (v/s est. +11% YoY). This aggregate underperformance has been led by a sharp drag from global commodities. Excluding Metals and O&G, the MOFSL Universe and Nifty both have posted a solid 28% earnings growth (v/s expectations of 25% and 22%, respectively), fueled by BFSI and Autos. Along with Metals and O&G, the Cement sector too has dragged 3Q earnings.

* Excluding BFSI, profits would have declined 6% YoY (v/s est. +1% YoY). Until now, 29/41 companies within our Coverage Universe has seen an upgrade/downgrade of more than 3% each, respectively, leading to an adverse upgrade-to-downgrade ratio for FY24E. Moreover, EBITDA margin of the MOFSL Universe (excluding Financials) has contracted 260bp YoY to 13.3%.

* Profits of the 35 Nifty companies that have declared results so far have risen 18% YoY (v/s est. 15% YoY), fueled by financials. Excluding these, profits would have grown 12% YoY (v/s est. 9% YoY). Further, Nifty profits would have increased 28% YoY (v/s est. 22% YoY), excluding Metals and O&G. Twelve companies in Nifty have reported profits below our expectation, while ten have recorded a beat .

* Nifty EPS remains unchanged: FY23 and FY24 EPS estimates remain unchanged at INR822 and INR990 (v/s INR820 and INR990 earlier), respectively, as downgrades in Metals and O&G are offset by upgrades in Automobiles and Private Banks.

* Summary of the 3QFY23 performance thus far: 1) Technology: in-line with our expectations despite the 3QFY23 seasonality coupled with looming macro uncertainties. The tier-1 pack has relatively outperformed the tier-2 set (under our Coverage) in 3Q both in terms of topline growth and margins. 2) Banks: Earnings bliss continues for the banking sector with most banks reporting robust margin expansion while asset quality continues to improve. Advances growth has been healthy at 4-5% QoQ, barring HDFCB that reported a 2% QoQ growth. 3) Automobiles: The initial set of results has been encouraging with almost all the companies exceeding our estimates (except EXID, which has been in-line). The key trends are: a) a strong mix leading to a sharp beat on ASP, b) full benefit of commodities, and c) FX gains. 4) Consumer: A clear divergence has been visible between staples and discretionary performances in the results declared so far. While expectations were admittedly low from staples owing to weak rural demand in 3Q and a delay in commodity cost decline, the overall expectations have largely been met. 5) Oil & Gas: The sector so far has bagged mixed results with GAIL, IOCL and BPCL posting lower-than-estimated results while RIL, PLNG and MRPL reporting results ahead of our estimates. 6) NBFCs – Lending: Healthy volume growth combined with higher ticket sizes in vehicle finance has led to strong disbursement momentum for vehicle financiers

Key 3QFY23 result highlights

* As of 2nd Feb’23, 35 Nifty stocks have reported a sales/EBITDA/PBT/PAT growth of 19%/18%/18%/18% YoY (v/s est. 16%/15%/15%/15%), respectively. Of these, 10/12 companies have surpassed/missed our PAT estimates; on the EBITDA front, 11/10 of these companies have exceeded/missed our estimates, respectively.

* For the 127 companies within our MOFSL Universe, sales/EBITDA/PBT/PAT growth have stood at 19%/8%/4%/7% YoY (v/s est. 15%/9%/10%/11%), respectively. Excluding Metals and O&G, the companies within MOFSL Universe have recorded a Sales/EBITDA/PBT/PAT growth of 19%/19%/24%/28% YoY (v/s est. 16%/18%/ 22%/25%), respectively.

* Among the Nifty constituents, Tata Motors, Dr Reddy’s Labs, Maruti Suzuki, Bajaj Auto, Reliance Industries, Wipro, HUL, Kotak Mahindra Bank, and Britannia have exceeded our profit estimates. Conversely, JSW Steel, SBI Life Insurance, BPCL, Cipla, HDFC Life Insurance, Asian Paints, Coal India, UPL, and Ultratech Cement have missed our profit estimates.

* Within the MOFSL Universe, Automobiles, PSU Banks, and NBFC Lending have recorded an FY24E earnings upgrade of 7%/3%/2%, respectively. Conversely, Real Estate, Insurance, Cement, Metals, Oil & Gas, Specialty Chemicals, and Logistics have witnessed an earnings downgrade.

* View: The 3QFY23 corporate earnings so far have been in line, with performance of heavyweights, such as Tata Motors, Coal India, Axis Bank, ICICI Bank, HDFC Bank, Maruti Suzuki, and TCS, driving the aggregate. The spread of earnings has been decent with 62% of our Universe either meeting or exceeding profit expectations. However, the growth has been led by just BFSI and Autos while Metals, Oil & Gas and Cement have recorded a YoY earnings decline for the quarter. Given the continuity of policy focus and pronouncements, we believe markets will discount the Union Budget 2023 and shift their focus to: a) overall growth-inflation paradigm in a challenging global backdrop and b) corporate earnings growth trajectory, which has remained resilient so far in 1HFY23 (albeit witnessing some challenges with downgrades outweighing upgrades in 3QFY23). The forthcoming RBI policy meet will be an important policy event to gauge any pause in the near-term monetary tightening measures. After the recent correction, valuations are in the fair value zone with Nifty trading at 17.5-18.0x FY24E EPS band and thus offering room for upside if the corporate earnings delivery continues. We prefer BFSI, IT, Industrials, Auto and Cement while we are UW on Energy in our model portfolio.

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