India Strategy: Financials driving PAT growth while commodities slip into loss pool commodity users to benefit from lower prices ahead - ICICI Securities
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On a free float (FF) basis, PAT growth (YoY) within the NIFTY50 index so far is around 3%. Revenue and EBITDA YoY growth (non-financials) stand at 25% and -1% respectively. For the broader NSE200 universe, the FF PAT contraction is ~4%. Overall YoY increase in aggregate profit during Q2FY23 for the NSE200 universe so far is primarily being driven by financials, whose profit pool expanded by 47%
On the flip side, commodity companies within the NSE200 have slumped into the loss pool on an aggregate basis due to declining realisations as global prices cool off along with introduction of new taxes (windfall taxes, export duty, etc). The contraction in aggregate PAT within commodities is significantly higher than the expansion in profit pool of other non-financial stocks so far (IT, auto, industrials, tobacco, consumption, RIL and others).
Contraction in profit pool of commodity producers due to falling prices is likely to augment the profit pool of commodity users going ahead if the robust domestic demand environment continues (Chart 2): Although still elevated compared to pre-covid period, commodity prices have started to cool off from the spike seen during Q1FY23 while shipping costs have also fallen sharply. Moderation in these two costs will likely arrest further margin erosion for commodity users going by the latest commentary of companies in sectors such as auto, consumption and other industrials. On the other hand, robust domestic demand in areas related to the investment cycle (industrial capex and real estate) and higher end discretionary consumption will allow such companies (commodity users) to retain their pricing power.
Some of the loss in the profit pool of commodity producers will also see transfer towards public spending via additional taxes (windfall profit tax on oil producers, export duty, etc.)
Beats and misses in Q2FY23 evenly poised so far: Earnings-beats/misses are evenly poised so far for NSE-200 with major beats from midcaps cushioning more misses from the NIFTY Next50 index. In NSE-200, financial and autos are dominating with more beats while cement and metals are dominating with more misses. Technology and FMCG earnings have been neutral.
High frequency indicators provide cues to robust domestic demand–
Strong manufacturing and services: PMI-Manufacturing stood at 55.3 while GST collections at Rs1.52trn for Oct'22 were both robust.
Core sector growth in Sep’22 was 7.9% and non-food credit growth in Oct’22 was 18.4% YoY.
H1FY23 fiscal deficit stood at Rs 6.2 trn or 37.3% of annual estimates. High tax buoyancy has helped the fiscal position.
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