BY Manish Jain
Q3FY23 was supposed to be fairly important to determine the direction in which equity markets would take. A number of macroeconomic factors (such as the Current Account Deficit increasing, Currency depreciation, inflation, tightening, etc.) which were impacting the market are now getting alleviated. The expectation is that market direction would change from value orientation to growth orientation. The good news is that rural growth seems to be stabilizing, and the outlook therein seems to be improving, which augurs well for consumption growth.
The not-so-good news is that so far, the result season seems to be a fairly mixed bag. ~40% of companies have announced results in Q3 with an upgrade/downgrade ratio of 1. Large companies have managed to deliver low teen earning growth mainly led by margin expansion as volume growth has moderated. Mid and small-sized companies have delivered fairly robust growth owing to share gains. Today, we would like to take an opportunity to elaborate on two sectors where we are currently most constructive.
The current quarter was not as bad for IT services companies as the street anticipated. Post Q2FY23, despite a reasonably strong set of numbers, the sector continued to be lackluster largely in anticipation of a guidance cut due to the US and EU economic slowdown. The street was expecting revenue impact and guidance cut to become visible in the current quarter, however, Tier-1 IT companies outperformed on revenue performance compared to expectations barring Wipro. The guidance, however, has been muted for the upcoming 4QFY23 for most of the large companies barring HCLT. Although, it is still not as bad as feared. Growth in the EU segment was a positive surprise and was encouraging for most companies with differentiated offerings. Going forward, we expect 4QFY23 to be a fairly crucial one considering client budget finalization and clarity on macro impact.
For discretionary consumption companies, the third quarter is critical as, traditionally, it has been a strong quarter as the festive season and wedding cheer tend to boost demand and consumer sentiments. In line with expectations, we witnessed robust demand for discretionary consumption companies during the quarter. However, the point of caution is that rural demand still continues to be weak and consequently growth is largely led by the Premium segment whereas value segment continues to report weak growth.
The other encouraging sign has been that gross margins have begun to improve sequentially due to stability in RM prices and the outlook therein remains optimistic. So, it’s not all as bad as the markets are making it seem. Stay invested and stay invested in quality.
(Manish Jain is a Fund Manager at Coffee Can PMS, Ambit Asset Management. The views expressed in the article are of the author and do not reflect the official position or policy of FinancialExpress.com.)