India Inc's limping earnings recovery in March quarter likely to be lopsided

Inflation may continue to weigh on demand without any meaningful improvement in the underlying consumption trends

Apr 12, 2023, 14:08 IST5 min

Corporate earnings in the fourth quarter of FY23 will ...

India Inc continued to cope to safeguard shrinking margins amid stretched balance sheets in the last three months of financial year 2023. Even as demand worries persisted, concerns of high costs crimping margins in an uncertain environment led by increasing interest rates, ballooning inflation and weak global macro situation, remained. Analysts feel corporate earnings in the fourth quarter of FY23 will be lopsided and most of the heavy lifting is likely to made by banking, financial services and the insurance (BFSI) sector companies. Decline in commodity-led companies, like the metal sector, is expected to be a drag on overall earnings in the quarter. “The contraction of the Ebitda (earnings before interest, taxes, depreciation, and amortisation) margin has been the sore point for earnings excluding BFSI in FY23 as they have compressed by nearly 300 basis points from peak. However, the pain now seems to be ebbing. The uptick shall depend on demand dynamics. Year over year, autos, pharma and consumer services are likely to turn in maximum margin expansion while cement, power and IT are likely to suffer margin compression," says Prateek Parekh, equity strategist, Nuvama Group. Parekh estimates Nifty earnings to grow 13 percent year-on-year (YoY) in Q4FY23 but excluding commodities growth is likely to be higher at over 20 percent (YoY). The slowdown in Nifty earnings is basically due to weak commodity earnings and margin pressures in non-commodity sectors. Key metal prices declined in the past several months while brent crude has also continued to see a fall in the last three quarters. In the three months ending March, brent crude prices dragged 6 percent, after falling 2 percent in the previous quarter and a sharp slump of 27 percent in the second quarter of FY23. “The aggregate performance of the companies under coverage is likely to be marred by a sharp drag from metals, which is likely to report a 35 percent YoY earnings decline," says Gautam Duggad, head of research, institutional equities, Motilal Oswal Financial Services. In the March quarter, he expects the sales and Ebitda of companies under the brokerage firms’ coverage to grow 9 percent and 13 percent, while for Nifty, to rise 9 percent and 16 percent, respectively. While auto and BFSI are the key growth drivers, with 107 percent and 56 percent YoY earnings growth, global commodities such as metals and oil and gas will be the prime drags with 44 percent and 13 percent earnings decline YoY, respectively, Duggad adds. Analysts at Kotak Institutional Equities expect modest year-on-year growth in net income for consumer staples, IT services and pharmaceuticals. The house estimates Q4FY23 net profits of Sensex companies to increase 10 percent (YoY) and 8 percent (quarter-on-quarter) and for Nifty companies to increase 9 percent (YoY) and 8 percent (QoQ).

Consumer demand

Management commentaries by companies like Marico, Godrej Consumer Products and Dabur India indicate that inflation continues to weigh on demand and that there has been no meaningful improvement in the underlying consumption trends. While rural growth has remained sluggish, urban consumption has also softened to some extent. Even as general consumption trends remained muted, Kunal Vora, head-India Equity Research, BNP Paribas India, expects the fourth quarter of FY23 to be possibly a strong quarter for Indian FMCG companies, as the benefits of past price hikes are likely to drive double-digit revenue growth, while the cool-off in raw material prices and lower-than-usual advertisement spends should help margins. “We believe some of these trends may not sustain as the benefit of price hikes is likely to fade, part of the raw material cost benefits will get passed on to consumers and advertisement spends will return to normal levels," Vora adds. Over the past year, FMCG companies have hiked prices to combat inflation, which led to subdued volumes, hit demand and down-trading. Nomura analysts feel there was a bit of recovery in the rural market demand led by stable product price hikes, lower inflation and improving wage growth. Despite a good harvest of rabi crops, an erratic rainfall had some impact on productivity, as wheat requires dry weather conditions for the crop to ripen. Nomura analysts believe recovery in the rural market demand will be prominently visible only in the first quarter of FY24, after the harvest of rabi crops. “Unbending demand in premium and upper-income discretionary categories to remain intact, aiding in maintaining overall urban demand momentum," say analysts at Nomura.

Earnings downgrade?

For FY24, the analysts are forecasting a 20 percent earnings per share (EPS) growth of Nifty companies with demand likely to moderate only a little.

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However, Parekh considers that estimate too at risk as demand deterioration is broadening from exports to some segments of domestic consumption and it will eventually weigh even on credit and capex. According to Parekh, Nifty EPS FY23 is likely to grow 10 percent after a growth of 40 percent in FY22 with commodities as the main drag. “Demand rather than costs are likely to be the key concern in FY24," he cautions. Kotak Institutional Equities analysts estimate EPS of the Sensex companies at Rs 2,678 for FY23 and Rs 2,986 for FY24 and of the Nifty at Rs 806 for FY23 and Rs .916 for FY24. Duggad has maintained FY23 Nifty EPS at Rs 812 but reduced FY24 and FY25 EPS estimates by 1.5 percent and 2.2 percent to Rs 978 and Rs 1,119, respectively. He sees the Nifty EPS to grow 12 percent in FY23. With markets around the world going through a global liquidity crisis and fears of an impending recession, factors like the pace of interest rate hikes, the monsoon in India and, most importantly, consumer demand trends will be critical. As the valuation of Indian markets continue to remain stretched, even as it moderated in last few months, the analysts will be looking for a steady recovery in corporate earnings.

Motilal Oswal Financial Services Nuvama Group

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