Vijay Kumar Gaba

(i)    The management commentary for FY23 would be important to understand the impact of global growth, inflation and geopolitical conditions on Indian businesses. BY now most of the corporate management would have assessed the impact on their respective businesses and their assessment would be reflected in their guidance for FY23.

(ii)   The present earnings estimates of analysts for FY23-FY24 may not be factoring the latest developments, especially with regard to monetary policy, inflation, and demand outlook. Since the previous result season most agencies have downgraded India’s growth forecast; increased inflation (wage of raw material cost inflation); rates (cost of capital); and currency (import inflation) forecast. The latest results may see analysts rationalizing their forecasts to factor in latest management guidance; macroeconomic forecasts and market (demand) conditions. This shall give a more realistic picture of the current market valuations.

(iii)  Past one year has seen a massive secctoral shift in momentum. The focus has shifted overwhelmingly towards commodity producers (especially metal and energy) from commodity users (FMCG, consumer durable); deleveraging (financials suffered); asset inflation (real estate) and exports (Textile, IT Services, Food etc.). Recently we have witnessed momentum moving away from IT Services (due to margin concerns) and Realty (demand concern as cost of funds rise). The latest quarter results and management commentary would either strengthen the current sectoral preferences of the market or cause a sectoral shift. I shall be closely watching the IT, Financials and Metal sectors for a change in preference. A positive commentary on rural demand may trigger a positive move in FMCG and Auto also.

I have noted the following forecasts of brokers for the current result season. The market participants mostly appear positioned in consonance with these forecasts. I shall be watching the results for any significant deviation that may trigger repositioning in the market, and hence create some trading opportunities.

Overall Results

Q4 FY22 and Q1 FY23 are likely to be challenging quarters for Corporate Inc as they try to strike a balance between rising input costs and demand.  Hike in prices has so far been well absorbed, with demand remaining intact. This can be reflected in revenue projections for our coverage universe, which is likely to grow by 25% y/y despite a higher base effect. In fact, Q1 FY23 revenue growth is also likely to remain robust given the depressed activity in the first quarter of the preceding fiscal year.

Things are not rosy on the operating margins front, which is expected to contract by 27bps sequentially and 97bps y/y basis. As commodity prices continue their surge, companies endeavor to further pass on the costs but remain cautious on the impact on demand. This will likely translate into margin pressure in the quarters ahead. However, we see that the price hikes could be a blessing in disguise in the medium term, especially when sales realisation remains intact even after commodity induced cost escalation subsides.

Adjusted PAT is likely to grow by 32% y/y, largely driven by strong performance from Banks. Automobiles to see steep contraction of 50%, hampered by both supply side issues and rising input costs. (Yes Securities)

IT Services

Margin pressure bites in a seasonally weak quarter. Sequential growth for Indian IT will be moderate in March 2022 quarter and in line with historical seasonal trends. Margins will remain under pressure resulting from elevated wage increases, onsite as well as offshore. Net result is a moderate EPS growth on yoy and moderate growth to decline on sequential basis. Rupee depreciation is essential to bridge the gap between cost increases and moderate price increases in FY2023. Demand trends continue to be robust. While we are constructive on the space, we are surprised with resilient stock prices against the backdrop of increasing risks. (Kotak Securities)

We expect the demand outlook to remain strong in FY23, although the initial guidance may bake in a potential impact on demand from elevated inflation in the US and Europe. Companies will continue to post strong growth numbers on the back of tailwinds for the industry on account of Digital and Cloud transformation initiatives with enterprise clients. Hiring trends in recent quarters indicate continued strength in demand with good visibility. (MOFSL)

IT Services sector is expected to report strong growth in Q4FY22 primarily on account of the new large deal wins and a ramp-up of deals won in the previous quarter despite seasonality furloughs. IT spending in North America and Europe has gained momentum and demand for digital transformation has increased exponentially. Furthermore, improved macro-economic opportunities across the globe are expected to provide further growth impetus to the sector moving forward. However, supply-side constraints are likely to impact revenue growth momentum in the short term. (AXIS Securities)

Financials

We expect a strong quarter on earnings growth for banks in 4QFY22, but driven solely by lower provisions. Operating profit growth for banks would continue to remain weak. We expect further improvement in asset quality ratios. Weak loan growth remains a key concern. We expect strong performance from NBFCs across growth, margins and asset quality. (Kotak Securities)

Our estimates indicate continued traction in earnings over FY22/FY23 even as we expect treasury income to remain modest and near-term opex to remain elevated. Further, this momentum is likely to continue over FY23E as well, as we project Private and PSU banks to report earnings growth of 30% and 36% in FY23, respectively. Overall, our Banking coverage universe is anticipated to report earnings growth of 33% in FY23, after posting strong growth of 46% over FY22E.

Asset quality outlook robust; core credit cost undershooting across banks: We estimate slippages to remain modest, which along with healthy recoveries and upgrades would result in an overall improvement in asset quality – barring the mid-sized banks that could see stable trends. The Retail and SME segments could experience some slippages; however, the Corporate segment is likely to remain resilient. While the performance of restructured book would be important to assess the credit cost trajectory, we nevertheless estimate credit cost to undershoot across banks, thereby enabling further shore up of contingent/restructured / SR provisions. (MOFSL)

Consumers

The 19 Consumer companies under our coverage universe are likely to report muted cumulative growth numbers – revenue/EBITDA/PAT of 8%/7%/5% – in 4QFY22. This is on a cumulative sales/EBITDA base of 26.7%/26% in 4QFY21. Two year average sales/EBITDA growth is expected to be 17.2%/16.3%. Sales growth will largely be led by price hikes as Staples volumes hover in the negative to slightly positive range, impacted by spiraling inflation and a slowdown in rural demand. Inflation has been the theme in 4QFY22, with already elevated commodity costs pushed further upwards owing to the Russia-Ukraine war, which broke out in Feb’22. With most companies having taken steep price hikes in 3QFY22, managements were already apprehensive of raising prices further as it risked affecting demand.

However, spiraling input costs compelled most managements to raise prices further in an effort to protect margins. The recent correction in stock prices has resulted in pockets of opportunities, especially in companies with a lower exposure to commodity cost pressures and strong structural growth visibility. In the case of distribution channels, e-commerce continues to strengthen its salience for most Consumer companies, while general  trade (GT) remains resilient. Recovery in the MT channel, while still not back to pre-COVID levels, is certainly well on its way. However, the recovery in certain categories may not be as strong as consumers tighten their purse strings when looking at discretionary purchases. A few key developments to monitor include: a) a fresh COVID wave engulfing the country, b) further escalation in the ongoing conflict in Ukraine continuing to affect commodity costs, and c) extended slowdown in rural demand. On the positive side, a good Rabi harvest may help boost rural demand. (MOFSL)

Consumer discretionary

We expect the consumer discretionary to report slower revenue growth of ~8% YoY in Q4FY22 mainly due to high base (+41% in Q4FY21) and lower volume offtakes. Volume offtake of coverage companies is likely to decline in the range of 7-12% on account of pre price hikes inventory built by dealers in Q3 and lower demand amid pandemic led restrictions.

Sector wise, paint companies are likely to report revenue growth in the range of 7-9% YoY led by price hikes of ~21% taken during 9MFY22. On the fast moving electrical goods (FMEG) front, the coverage companies are likely to see revenue growth in the range of 5-9% driven by price hikes of about 15-17% in 9MFY22. We believe extended winter and pandemic led restrictions have restricted volume offtake of cooling products.

Key raw materials such as titanium dioxide (TiO2), vinyl acetate monomer (VAM), aluminium, high density polyethylene (HDPE), low density polyethylene (LDPE) witnessed upward movement in the range of 9-60% YoY. We believe limited price hike against the steep rise in raw material prices is likely to weigh on gross margins. (ICICI Direct)

Cement

Our dealer checks suggest that cement off-take improved significantly in the last two weeks of March 2022, resulting in flat yoy (+19% qoq) volumes in 4QFY22 despite a subdued start. We estimate 1% qoq higher realization and costs to remain flat qoq as operating leverage benefits offset commodity cost inflation. We estimate EBITDA to improve by ~Rs100/ton qoq for our coverage universe in 4QFY22. Costs inflation would further accelerate in 1QFY23 and would require 7-8% price hike to pass costs, suggesting significant downside risks to earnings estimates. (Kotak Securities)

In 4QFY22, a sharp divergence in earnings can be expected depending on the ability of the companies to source coal or petcoke at relatively competitive rates. For 4QFY22, we are building in 9.3% YoY revenue growth for the sector, driven by ~9.7% YoY growth in realization whereas volume is expected to remain flat (marginal decline of 0.3% YoY). Average realization on QoQ basis is expected to rise by 2.3% only. On the other hand, operating costs are likely to increase by 21% YoY, largely driven by higher power & fuel costs. As a result, we expect the industry to deliver EBITDA decline of 26% YoY. EBITDA/mt for the industry is likely to increase marginally from Rs900 in 3QFY22 to Rs920 whereas EBITDA margin is expected to remain flat QoQ at 16.5% (down 785bps YoY). PAT is likely to decline by 31% YoY. FY23 appears to be a tough year for the industry as coal prices are expected to remain elevated for a prolonged period given the global tightness in supply and geopolitical tensions. (Nirmal Bang)

Speciality Chemicals

We see the likely hit on demand as well as margins from the supply disruption across energy, fertilizers and chemicals sectors, aggravated by the Russia-Ukraine conflict, cast a shadow on 4QFY22E for NBIE Chemical stocks. The buoyancy in freight rates (up more than 100% YoY) is an added worry. On the brighter side, we see pricing power supporting margins. (Nirmal Bang)

Oil and Gas

We estimate the oil & gas sector’s aggregate EBITDA would increase by 11.2% YoY/3.1% QoQ, given OMCs’/ONGC’s high GRMs and higher realisations. We anticipate CGDs’ EBITDA would dip by 20.5% YoY owing to high input spot prices (~3.5x YoY) and lower margins. (Edelweiss)

Auto

We forecast revenues for the auto stocks under our coverage to remain flat yoy in 4QFY22 led by (1) chip shortage impacting PV production volumes and (2) weak 2W segment demand, offset by (1) recovery in CV segment volumes and (2) higher ASPs. We expect EBITDA for companies under our coverage (excluding Tata Motors) to decline by 10% yoy due to multiple cost pressures. Suppliers will also have a weak quarter with 18% yoy decline in EBITDA in 4QFY22. (Kotak Securities)