Equity Strategy: Q4 results lead to a small earnings cut

Downgrades were higher for 2nd quarter on trot; margin fall contained, but worst of price impact lies ahead

Loan growth above 15% and profit above 50% for Axis, ICICI and Kotak.

Jefferies’ coverage universe pre-ex earnings growth of 25% was boosted by financials & global commods; ex of which, growth would have been half. Margins declined at a reduced pace; though worst of commodity price impact is ahead. FY23 EPS cuts seen for industrials, auto ancs, pharma, IT and cement; compensated by upgrades in banks, property, & commodities. Consumer driven sectors, viz. Autos & Staples saw only small cuts (due to price hike) which is a positive.

Downgrades more for 2nd consecutive qtr: Jef analysts cut the FY23 earnings estimates for 54% of the 127 cos (vs. 57% post Dec’qtr). Our analysis of consensus estimates of the Nifty100 stocks shows that sectors seeing notable earnings downgrades for FY23 were industrials, auto ancs, IT, pharma and cement. Only small cuts seen in autos and staples. Lending financials, real estate, metal, energy and chemicals saw upgrades. Nifty consensus earnings for FY23/24 saw limited downgrade of 0.2%/0.4% during the result season.

Margin erosion continues: Domestic cos. revenues/Ebitda grew 12%/6%

y-o-y, with Ebitda margins -0.2ppt q-o-q/-0.9ppt y-o-y. Cost-cuts and price hikes have helped partly mitigate the margin pressures. Autos, cement and telecom sectors saw q-o-q Ebitda margin improvement, while industrials, IT and pharma saw declines. Employee costs rose 16% y-o-y, but we see this as a broader demand positive.

Key positives: Banks/lenders saw strong y-o-y earnings growth as asset quality trends were strong and system loan growth hit double digits. Loan growth above 15% and profit above 50% for Axis, ICICI and Kotak. Property cos. pre-sales jump continued (+33% y-o-y), with GPL and Lodha giving 25%+ growth guidance for FY23; pricing traction visible. Auto OEM results were mostly above or in-line vs. estimates, and earnings were upgraded for FY23. Margin trajectory has improved as price-hikes started to outpace commodity cost pressures and op. leverage helped. Consumer discretionary results for reopening plays such as Devyani (KFC), Varun Beverages (Pepsi) and Jubilant (Dominos) were strong with Ebitda up 15%+. Consumer durables results saw strong (30%+) revenue growth for Havells and V-Guard, helping tide over margin pressures. Metal results were positive but with earnings concerns as margin outlook weakened post recent price fall. Staples vol trend weak at +/-3% for majors such as HUL, Marico, Colgate and Dabur. Limited downgrades on margins holding up largely due to adspend cut.

Key negatives: Pharma generics saw largely in-line to below results as RM costs, generic pricing pressures sustain and a high base of COVID impacts domestic revenues. IT cos (ex TCS) saw 2-12% earnings downgrade, largely on margin issues, even as revenues were in-line. Guidance by majors though firm on 10%+ revenue growth. Insurance cos saw weak APE growth on Jan-Feb vols. impacted by 3rd wave. VNB growth for IPru Life and HDFC Life at 15%+ on higher margins. Industrial earnings were in-line to below, partly as execution has yet to catch up; order-flows expected to be strong on rising capex with L&T guiding for 12-15% growth. Cement unit Ebitda improved q-o-q in double digits; however, energy prices have again surged, hurting earnings outlook.

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