Financials lead earnings in Q1; metal & mining, IT firms among laggards

India Inc’s earnings growth in the quarter ended June 2022 (Q1FY23) was dominated by banking, financial services & insurance (BFSI) companies. On the other hand, sectors like metal & mining, oil-marketing, cement, and IT services were laggards. 

BFSI companies together accounted for 48 per cent of the incremental growth in corporate profits on a year-on-year (YoY) basis in the quarter. Below is the earnings scorecard of the 10 biggest sectors in Q1FY23. Krishna Kant & Ram Prasad Sahu give the lowdown.

Automotive

• Barring a few exceptions such as Tata Motors and Sona BLW Precision Forgings, most larger auto companies reported in-line or better than expected Q1 
• Revenues of most firms benefitted from improved demand, price hikes, and a favourable product mix
• Higher raw material costs weighed on margins across companies with larger impact on commercial vehicle makers. For Maruti, higher sales promotion and employee costs dented operational performance
• Easing supply concerns related to semiconductors should help firms clear backlog and register high growth. Monsoon and rural demand will be critical for tractors and two wheelers
• Higher operating leverage and easing raw material costs to ease margin pressure on firms
• While volume and demand outlook trends for FY23 of most auto segments, barring tractors, remain strong and festive demand should sustain sales, upsides could be limited, given the sharp rally; the BSE Auto index is up 28 per cent in the last three months

Information Technology

• IT services firms reported results that were broadly in-line or better-than-expected with growth across most verticals, reflecting a strong demand environment
• Tier II companies posted better growth rates, with their average at about twice the rate of growth of the larger peers  
• Despite elevated concerns about a worsening macro environment, inflation and recession fears in key markets, most companies indicated that the same has not impacted deal pipeline which has remained robust.
• Barring a select few, most companies saw severe margin pressures on the back of wage hike, higher subcontractor expenses and increased travel costs.
• Operating leverage, pricing and favourable foreign exchange movements were positives. Margin pressures are expected to remain in the near term
• Motilal Oswal Research has retained its positive stance on the IT sector as it expects sustained growth with stable margins over the medium term. Infosys, TCS and HCL Tech are preferred picks

Metal & Mining

 

• After two years of unprecedented boom in earnings, metal and mining companies reported a decline in margins and profits in Q1
• Their combined net profit was down 10.1 per cent YoY, its lowest level in the last six qtrs. 
• The operating margins in the sector was down 720 basis points YoY to 21.1 per cent of the revenues in Q1, from a record high of 28.2 per cent in Q1FY22
• Analysts expect further margin contraction in the sector due to a decline in metal and ore prices, and higher energy and operating costs
• India-focused steel makers such as JSW Steel and Steel Authority of India reported bigger decline in earnings, while Tata Steel performed relatively well due to a better showing by its European business
• Non-ferrous producers such as Hindalco and Hindustan Zinc also reported better earnings than steel makers in Q1
• Cement makers also saw margins and earnings contraction due to higher energy and transport cost and sub-par volume growth

Capital Goods & Infrastructure

• Q1 was a strong quarter for capital goods and construction & infrastructure companies with high double-digit growth in earnings and revenues
• The combined net profit of companies such as Siemens India, ABB, Cummins India and Hindustan Aeronautics was up more than 6 times from a low base in Q1FY22, while their combined net sales were up 48 per cent YoY
• Infrastructure developers, such as Larsen & Toubro, IRB Infrastructure and GMR Infra, also had a good Q1 with 33.5 per cent YoY rise in their combined net profit, while their combined net sales were up 22 per cent YoY
• Adani Ports & SEZ, the biggest port operator in the country, however reported decline in earnings due to a mix of poor volume growth and a faster rise in expenses

Oil & Gas

 

• Oil & gas producers such Oil & Natural Gas Corporation and Oil India reported record high quarterly net profit in Q1 due to prices
• Independent crude oil refiners such as Mangalore Refinery & Petrochemicals and Reliance Industries also reported a big jump in earnings in Q1 as Western sanction on Russian oil led to a spike in prices of refined fuels such as diesel, petrol and aviation turbine fuel
• Public-sector oil marketing companies (OMCs) such as Indian Oil, Bharat Petroleum Corporation and Hindustan Petroleum Corp spoiled the show with a big decline in earnings due to price control
• The three OMCs reported a combined net loss of Rs 16,800 crore in Q1, their worst show in over a decade
• Gas companies such as Mahanagar Gas and Gujarat Gas reported decline in earnings, while GAIL (India) and Indraprastha Gas saw a big jump in earnings

Retail & Consumer

• It was a strong showing by apparel retailers (Page Industries, Trent, Aditya Birla Fashion and Retail) which beat estimates on the back of sharp recovery in demand across segments and aggressive store expansion
• Led by growth in the decorative business, market leader Asian Paints had a strong showing, followed by Berger Paints and Kansai Nerolac, which benefited from a recovery in the industrial segment
• Restaurant majors like Jubilant FoodWorks and Westlife Development reported a robust performance with pick up across delivery channels. Going ahead, network expansion, pricing power and cost control efforts are expected to help combat rising costs
• While revenues of consumer durable makers benefitted from the trio of low base, price hikes and volume gains, margins were impacted by higher input costs and inventory. Higher advertising costs and inadequate price increases impacted margins of Havells. Improvement in consumer and industrial demand would be a key re-rating trigger for the fast moving electrical good makers

Banking

(Q1FY23-YoY change in %)	Interest Income	Total Income	Operating Expenses	Employee Cost	Provisions & Contingencies	Interest Cost	Net Profit
Axis Bank	17.0	12.2	20.2	18.0	-89.1	13.4	91.0
Bank of Baroda	11.1	1.0	8.9	-0.5	-57.9	10.2	79.4
HDFC Bank	15.4	13.0	21.1	26.6	-34.0	16.5	19.0
ICICI Bank	16.1	16.2	16.4	20.0	-59.9	10.7	49.6
SBI	10.8	-3.1	6.6	-3.9	-56.3	9.4	-6.7

• Q1 was good for banks with 36.5 per cent year-on-year (YoY) growth in net profit and 10.3 per cent YoY growth in gross interest income
• Profit growth was driven by a continued decline in provisions for bad loans and expansion in net interest margins
• Earnings growth in Q1 was, however, lowest in the last two quarters and the numbers suggest a further slowdown in the forthcoming ones
• Operating expenses, including interest, salary and wages, grew faster than gross interest income for most banks
• Banks also reported a sharp decline in treasury income due to a fall in bond prices after rise in interest rates
• Banks’ combined non-interest income in Q1 was lowest in the last 11 quarters, and it could decline further due to a reversal of interest rate cycle
• State Bank of India, ICICI Bank and Bank of Baroda continue to outperform the Sensex while other large banks tare laggards

Fast-moving consumer goods

• Price hikes helped the sector post robust revenue growth with volume growth continuing to be sluggish in low single digits, while others saw declines
• Motilal Oswal Research highlights that reduced demand led to lower volumes amid a highly inflationary environment, while grammage cuts taken to pass on the material cost increases, also impacted volumes adversely
• Market leaders Hindustan Unilever and ITC posted better than expected results while, for others, they were largely in line with brokerage expectations
• Commodity inflation impacted margins of most firms and the same is expected to remain in Q2 before recovery in the second half of FY23
• The progress on the monsoon front and improvement in rural cash flows is a key driver of growth. Valuations factor in the upside with the BSE FMCG index rising 17 per cent from mid-June levels

Pharmaceutical

• Aided by strong growth in the domestic market and emerging/US market, pharma firms reported results which were above the Street expectations. Sun Pharma and Cipla were the outperformers while Lupin, Biocon, and Dr Reddy’s disappointed
• While Covid-19-related sales declined, it was offset by an uptick in non-Covid-19 drugs and seasonal demand
• The growth expectations are already factored into the stock prices with brokerages having a ‘neutral’ stance on most frontline healthcare stocks

Finance

(Q1FY23-YoY change in %)	Interest Income	Total Income	Operating Expenses	Employee Cost	Operating Profit	Interest cost	Net Profit
HDFC	-25.2	-22.8	-29.6	-1.7	2.0	16.1	5.3
Bajaj Finance	35.3	37.7	38.9	91.9	36.3	17.4	159.0
Muthoot Finance	-5.7	-5.4	8.3	24.4	-20.5	-3.2	-16.2
HDFC Life Insurance	30.9	-54.3	-56.5	52.0	575.6	--	22.0
SBI Life Insurance	32.8	-69.9	-71.3	23.4	11.0	--	17.8

• Non-bank lenders and insurance companies reported double-digit growth in earnings, driven by lower operating expenses, including interest cost
• Their combined was up 47.6 per cent YoY, the best in five quarters
• Consumer lenders such as Bajaj Finance (BF), Shriram Transport Finance and M& Finance, were top performers, while housing finance companies such as HDFC and LIC Housing were laggards
• Non-banking lenders, however, continue to lose market share to commercial banks — a fact that raises a question mark over their earnings momentum
• The Street however remains bullish on BF, M&M Fin and SBI Life Insurance Company