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MOSL: INDIA STRATEGY - 1QFY23 PREVIEW: A glass half-full!

 

Financials, O&G, and Autos to drive 1QFY23 earnings; FY23 estimates stable

• As we usher in the first earnings season of FY23, the market is at a crossroads. Despite a multitude of headwinds – adverse macros, rising rates, tightening liquidity, and volatile commodity costs, the Nifty has outperformed global markets YTD. FII outflows in 1QFY23 have been the highest ever at USD15b. This, coupled with higher 10-year G-Sec yields, a worsening external balance, and consequent currency depreciation provided a very challenging backdrop to the equity market. However, robust domestic equity inflows (DII inflows stood at USD15.2b in 1QFY23) and decent corporate earnings have kept the Indian market relatively resilient. As we look ahead, we note that commodity costs have corrected in the last couple of weeks, offering some respite to the adverse macros. Global bond yields have moderated by 20-50bp from the recent highs and earnings estimates for the Nifty haven’t seen any worthwhile cuts. Meanwhile, valuations for the Nifty have moderated to 18.7x FY23 EPS, in line with its long period averages. Thus, the glass appears half-full to us, delicately balancing the headwinds with some silver linings.
• After two healthy years (15%/36% in FY21/FY22) of earnings growth, despite the COVID-19 pandemic, we are building in an 18% growth for the Nifty in FY23, led by BFSI, O&G, and Autos. Recent government actions on the O&G front have muddied the earnings picture for the Nifty and created additional uncertainties. The benefit of the recent moderation in commodity costs will accrue only in 2QFY23 and beyond. We do see some earnings downside risks in the near-term as the delayed impact of higher and sticky inflation manifests itself in a pullback in consumption.
• On the macroeconomic front, GST collections in 1QFY23 have been robust at INR4.5t, up 37% YoY. Systemic credit growth (of ~12%) is showing signs of a revival after many years. Services PMI, at 59.2 in Jun’22, was at an 11-year high. Core sector growth came in robust too, even adjusted for the COVID-19 base. The quarterly updates from companies across sectors point towards moderate to healthy operational numbers. While major Banks and NBFCs (HDFCB, IIB, BAF, AUBANK, HDFC, FB, MMFS, etc.) reported a healthy momentum in loan growth, Auto volumes recovered across segments, on a low base of 1QFY22, supported by some improvement in semiconductor supplies. Discretionary Consumer players such as TTAN witnessed strong demand in 1QFY23, while DMART posted weak LTL numbers.
• We expect a 1QFY23 earnings growth of 21% YoY for our MOFSL Universe. The key drivers of this 1QFY23 performance are: a) BFSI – We expect Private Banks to report a PPOP/PAT growth of ~8%/40% YoY in 1QFY23. Earnings for PSBs will remain muted. NBFCs will see a steady quarter, despite seasonality. b) O&G – We expect our coverage universe to report a PAT growth of 17% YoY. Excluding OMCs, it will be up 132% YoY, due to higher refining margins. c) Autos – After the last three quarters of a YoY decline in EBITDA margin, we expect a YoY improvement in margins and a 7.7x expansion in profit on a low base. d) Consumer – We expect strong cumulative growth numbers for our Coverage Universe: revenue: 23%, EBITDA: 25%, and PAT: 30%. e) Metals – We expect our Coverage Universe to report a revenue growth of 21% YoY, but an EBITDA/PAT decline of 13%/19%, led by a sharp jump in input costs. f) Cement – We expect EBITDA/profit for our Coverage Universe (excluding GRASIM) to drop by 24%/ 27% YoY, while OPM should decline by 9.8pp YoY to 16.3%. g) Healthcare – We expect the decelerating trend in our Coverage Universe to continue, with a third consecutive quarter of a YoY decline in earnings.
• Nifty/MOFSL Universe to register 31%/21% YoY profit growth in 1QFY23E: We expect PBT/PAT for our MOFSL Universe to grow by 21%/21% in 1QFY23. BFSI, Oil and Gas, and Automobiles are likely to contribute 87% to incremental earnings in 1QFY23E. Excluding BFSI, we expect 1QFY23 earnings for the MOFSL Universe to record a relatively modest 13% YoY growth. Excluding OMCs and Financials, the MOFSL Universe is likely to see an 180bp YoY decline in EBIDTA margin to 20.5%. Sales/EBITDA/PBT/PAT for Nifty should grow by 35%/19%/ 29%/31% YoY in 1QFY23E. Excluding RIL and ONGC, we expect profit to grow by 13% YoY for Nifty constituents. These two companies contribute 65% to Nifty’s incremental earnings. Two-year earnings (1QFY21-1QFY23) CAGR for the MOSL Universe/Nifty is expected to stand at 69%/63%.