scorecardIndia Inc's Q3 earnings largely meet analyst expectations, but consumption slowdown a worry
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India Inc's Q3 earnings largely meet analyst expectations, but consumption slowdown a worry

India Inc's Q3 earnings largely meet analyst expectations, but consumption slowdown a worry
Business6 min read
  • India Inc’s profitability for the December quarter – largely in line with analyst expectations – moderated due to elevated levels of inflation
  • However, consumption slowdown and uncertainty about rural recovery remain hurdles in India Inc’s near-term growth prospects.
  • Banking, financial services and insurance (BFSI) and auto sectors are expected to lead earnings growth in FY23, while oil & gas, and metals sectors could drag earnings down.
India Inc’s profitability for the December quarter – largely in line with analyst expectations – moderated due to elevated levels of inflation. A consumption slowdown across both discretionary and staple segments had an adverse impact on corporate earnings, but management commentary underlined that the rural slowdown was ‘bottoming out’.

According to a consensus of analyst estimates, more than half of the corporate earnings were either in line or exceeded expectations.

“Margin recovery was the key highlight for Q3 FY23. Nifty operating margins (ex-financials) rose 230 bps (basis points) sequentially to 17%, primarily led by savings realised from lower raw material costs,” said a report by ICICI Direct Research.

The brokerage maintained its Nifty earnings outlook at 15% compounded annual growth rate (CAGR), with the Nifty50 and Sensex targets for the next 12 months set at 21,500 and 71,600, respectively.

Analysts at Motilal Oswal, on the other hand, cut their Nifty earnings per share (EPS) estimates by 1% to ₹812 for the full financial year 2023.

The brokerage added that it expects the banking, financial services and insurance (BFSI) and auto sectors to lead earnings growth, while oil & gas and metals sectors were likely to be a drag on earnings during FY23.

Banking and financial services companies lead Q3 earnings

The banking and financial services sector led corporate earnings in the December quarter – the Reserve Bank of India’s rate hikes and robust credit demand from the micro, small and medium enterprises (MSME) and retail segments helped banks post record profits in Q3. Asset quality improvements further boosted the performance of banks during the quarter.

For instance, India’s second-largest lender State Bank of India posted a profit of ₹14,205 crore in the December quarter, the largest quarterly profit in the bank’s 67-year history.

However, the dream run of Indian banks could soon be over as deposit rates are starting to catch up with lending rates, especially with increasing competition among banks to attract deposits.

“Margins are likely to witness stable-to-positive bias in the near term (though the quantum would moderate) but could witness a pressure over FY24 as cost of deposit continues to inch up,” said a report by Motilal Oswal.

Auto sector starts revving up

Aided by lower input costs and easing supply chain issues, the Indian auto sector saw its engines revved up in the December quarter.

Industry leader Maruti Suzuki reported a 133% year-on-year growth in its net profit, while Tata Motors posted its first profit after seven quarters.

“Quarterly results in the auto space were largely ahead of our estimates and healthy with margin recovery taking centre stage as most players benefitted from raw material price decline,” said a report by ICICI Direct Research.

On the other hand, though, demand in the two-wheeler segment continued to be a cause for concern, dragged down by weak performance in the entry-level segment.

Analysts at Motilal Oswal believe that a further softening in commodity prices will aid margin expansion in Q4 as well. However, exports, which account for a large portion of sales of companies like Bajaj Auto, will take another one to two quarters to return to normalcy.

IT sector to outperform in 2023 after a dull 2022

While industry leader Tata Consultancy Services (TCS) reported subdued earnings for the December quarter, its peer Infosys beat analyst expectations and raised its revenue guidance for FY23. However, both the companies underlined slowdown concerns in their key markets of US and Europe.

The IT sector went through a weak phase in 2022, especially after outperforming during 2020 and 2021, when the Covid-19 pandemic forced companies around the world to embrace digital transformation.

However, prospects look bright in 2023, according to a report by Motilal Oswal. “The outlook for the technology services sector remains positive given the long-term growth in technology-related spending resulting in sustained spends on associated IT services,” the report added.

The report added that the correction in valuations of IT companies was also another positive going forward. For context, the Nifty IT index corrected by 26% in 2022 while the Nifty50 index gained 4.3%.

“Given the emerging macro headwinds and economic slowdown in the developed markets (US and Europe), the tier-1 companies with robust scale and healthy balance sheets are likely to be in the survival-of-the-fittest mode,” the report added.

Consumption hits a speed breaker even as inflationary pressures ease

Consumption has slowed down across both staples and discretionary segments, according to analysts. Although inflation cooled down in the December quarter, management commentary highlighted that discretionary consumption declined in urban as well as rural areas.

“Multi-year low margins recorded in Q3 FY23 reflect some grave challenges, which could possibly be on account of heightened competitive intensity over the past two years and inflationary stress still pertaining in the discretionary value segment,” said a report by ICICI Direct.

That said, the companies’ outlook is not all that grim. India’s largest player in the fast-moving consumer goods (FMCG) segment, Hindustan Unilever, said that there were signs of a rural recovery.

“With lower inflation, strong winter crop sowing and signs of a pickup in farm incomes, it is likely that the rural slowdown is bottoming out,” said Sanjiv Mehta, CEO and MD, Hindustan Unilever.

However, there is no consensus among analysts on when a recovery in consumption will occur – while Motilal Oswal says there is a lack of clarity in this regard, analysts at Phillip Capital say there could be an uptick in the next one to two quarters on account of higher-than-usual weddings this month.

Top Nifty companies’ earnings upgrades & downgrades for FY24

Top upgrades

Earnings growth FY24E

Top downgrades

Earnings growth FY24E

Tata Motors


Divi's Laboratories




Bharti Airtel


Bajaj Auto


Eicher Motors


Dr. Reddy's Laboratories


JSW Steel


Coal India


Tata Steel


Source: Motilal Oswal


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