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MOSL: VOICES | INDIA INC ON CALL: Heavyweights weigh on earnings; decent spread performs a balancing act

VOICES | India Inc on Call: Heavyweights weigh on earnings; decent spread performs a balancing act

• In this report, we present the detailed takeaways from the 1QFY23 conference calls with various company managements, as we refine the essence of India Inc.’s ‘VOICES’.
• Corporate earnings in 1QFY23 missed expectations after several quarters. A few cyclical heavyweights led the aggregate miss even as spread of the earnings and accompanying corporate commentaries were good. Healthy monsoons and a normal festive season after two years should augur well for the consumption-oriented sectors. However, growth is still lopsided and is being fueled by BFSI. As the benefit of the recent moderation in commodity cost starts to accrue in 2HFY23E, we expect other sectors such as Consumer, Autos and Cement to contribute too.
• Most of the banks have guided for a sustained recovery in growth momentum propelled by continuous traction in retail, business banking and SME segments. Corporate segment growth too is likely to accelerate gradually, primarily driven by working capital loans while revival in capex is likely to occur over 2HFY23E. Margins are anticipated to witness a positive bias in the near term with banks having a high mix of CASA and floating rate loans to be better placed. In NBFCs, management remains watchful of the impact on NIM and credit growth for non-bank lenders. Hence, it will be important to monitor the impact on the stated parameters for non-bank lenders.
• For Consumer sector, performance was driven by price hikes, due to sustained high commodity inflation, and a return to normalcy in terms of mobility. Rural growth continued to remain weak but several company management teams believe green shoots are emerging for rural demand and a combination of good monsoons and higher government subsidies should provide the necessary fillip needed. While commodity costs have shown signs of stabilization towards end-1QFY23, the environment remains volatile. Management guidance for most companies suggests that gross margin pressures are likely to continue in 2QFY23, but should stabilize, if not improve notably, in 2HFY23E.
• IT sector saw some moderation in growth on the high base of FY22. Though demand environment remained strong, a few companies noted small pockets of demand weakness led by ongoing macro headwinds, especially in retail. Digital transformation and cloud migration remained in focus for enterprises to fuel their growth. The companies' strong order book and pipeline render comfort on near-term growth. Long-term growth too is expected to remain resilient because of prominent digital and cloud transformation initiatives by clients.
• In the Metals space, most of the companies highlighted: a) reduction in coking coal costs to reflect in 3QFY23E results and b) steel demand has accelerated in Jul'22 v/s 1QFY23. Inventory is high across the board and working capital has been locked due to high inventory and expensive coal payments.
• In Healthcare, companies indicated softening of raw material and freight costs v/s previous quarters. Having said this, they also indicated that costs would remain at elevated levels v/s pre-Covid period. The base business erosion subsided in the US generics segment. However, managements look forward for potential launches from 2HFY23 onwards, which would not only offset price erosion but also enable growth to some extent in the US generics segment.