The Q2FY23 results season for the quarter ended September 2022 is about to start. As usual it will start with the IT companies. How exactly did Q1FY23 fare on the quarterly result scale? Let us take a quick review. The 4,000 plus companies that reported their results for the June 2022 quarter reported overall revenue growth of 40.7% (Source: BSE aggregates). However, growth in profits was just at 22.3% (Source: BSE aggregates) on a yoy basis; lower on account of pressure on operating margins. On a sequential basis, compared to March 2022 quarter, the revenues were marginally higher by 4.1% but the net profits were lower by nearly 20% (Source: BSE aggregates).
The pressure on the bottom line came largely due to higher operating costs and higher interest income. But the impact was most visible when we looked at margins. Gross margins fell from 12.1% to 9.8% on yoy basis while net margins fell from 8.7% to 7.6% (Source: BSE aggregates). On a sequential basis, Jun 2022 gross margins fell 130 bps while net margins fell 230 bps (Source: BSE aggregates). Probably, the overall picture would have been a lot better, had it not been for the huge losses reported by the downstream oil companies. It is time to look ahead!
How does the big picture look like for Q2FY23
Broadly, the financials, rate sensitives and consumer stocks are likely to contribute positively to the earnings in Q2FY23. However, one can expect a good deal of pressure from sectors like metals and oil & gas. Downstream oil companies like IOCL, BPCL and HPCL are likely to have another quarter of steep losses in the September 2022 quarter. On a yoy basis, the top line revenues would continue to grow in double digits while the bottom line profits are likely to grow in mid to high single digits (Source: Broker Estimates).
Most of the profit pressure is likely to come from sectors like oil & gas, metals and pharmaceuticals. IT sector would still see margin pressure due to cross currency headwinds. However, with input costs still an issue amidst supply chain constraints, expect EBITDA margins to compress more than 300 bps (Source: Broker Estimates) in the quarter. While lower commodity prices will boost margins, pricing power will be much lower due to recessionary concerns. For the Nifty overall, the Q2FY23 EPS is likely to come around Rs216 per share (Source: Bloomberg Consensus Estimates) against Rs185 per share EPS in Q1FY23.
1. Oil companies will continue to face pressure
Q2FY23 will be challenging for upstream and downstream companies. While oil extractors like ONGC and Oil India will face pressure from falling crude prices, the likes of IOCL, BPCL and Reliance will take a hit on a sharp fall in gross refining margins (GRM). Of course, the oil marketing companies will continue to report losses as the petrol and diesel selling prices in the Indian market are running much below the cost of procurement. In addition, the oil exporters have faced pressure due to the windfall levies. Overall, oil is likely to be a major contributor to profit pressure in the quarter.
2. FMCG could see bigger dividends of higher prices
In the last 1 year, as the prices of agricultural and non-agricultural commodities went up sharply, most FMCG companies were quick to pass on the higher costs to consumers. However, with prices of inputs falling, most FMCG companies did not pass on the cost savings to the consumers. This has helped them defend margins. Also, the festive season is likely to give a big boost to demand (including revenge buying) and that will stand in good stead. Volume growth may not be substantial, but pricing power will make up for it.
3. Autos are likely to see a divergence in performance
Broadly, the four wheeler passenger vehicle (PV) segment is likely to delivery strong results due to improved margins and also a very low base. The recent booking numbers for Maruti, Tata Motors and M&M have been extremely impressive showing strong demand and top line growth in the quarter. However, the pressure would be more palpable for the two-wheelers as tepid domestic and international demand is likely to put a lid on their growth. In terms of top line and bottom line, expect the 4-wheelers to outperform the two-wheelers.
4. Metals could have another forgettable quarter
It is going to be a sort of double whammy for the metal sector. On the one hand, the prices of most metals have fallen sharply and that is reflected in the prices quoted on the London Metals Exchange (LME). At the same time, the prices of ores as well as other input costs like power, petcoke and freight have gone up sharply. Across the board, metal companies are likely to face pressure on the top line and also on the bottom line.
5. Banks and financials could get dividends of higher rates
It needs no reiteration that the RBI has hiked repo rates by 190 basis points between May 2022 and September 2022. The deposit rates have gone up but the lending rates have gone up much faster. Withing the banking system, it is the private banks that have a bigger chunk of repo-linked loans. Here there will be a direct benefit of the sharp spike in the repo rates. Even the asset quality of financials and banks are likely to be under control. Most banks have reported fall in gross NPAs and better recovery. That trend is likely to manifest in the September quarter numbers too. Insurance players could be a mixed bag, but it must be said that the risk of higher insurance compensation pay-outs would reduce sharply from the post COVID levels. That should help financials overall to post the best numbers in Q2FY23.
6. IT sector could face up to currency headwinds
There has reportedly been a reduction in attrition in Q2FY23 for the IT companies as fears of recession mean that employees are staying put. IT companies may also have a better hang of manpower costs. However, cross currency headwinds are likely to wipe out about 200 bps (Source: Broker Estimates) from the net margins. While dollar strength is still positive; the weakness in the GBP, Japanese Yen, Euro and Australian Dollar would more than offset the dollar gains. It is likely to be another quarter of pressure on IT companies, albeit for different reasons.
7. Pharma will still face price erosion in US markets
Profits of pharma companies are expected to improve, but only marginally. Pressure of price erosion in the US market amidst stiff competition remains an issue. However, pharma companies are seeing increasing traction in India, Latin America, Eastern Europe and other EMs. Input costs will be under pressure amidst supply chain constraints. Overall pharma will be neutral.
Q2FY23 will be a critical quarter for the Indian markets. Amidst the concerns over inflation, central bank hawkishness and recession fears, an unlikely beneficiary is likely to be the banking and financial sector. That should keep the markets happy!
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