The Q3 FY23 earnings season has trudged along on more or less on an anticipated and satisfactory terrain. The net sales growth for Nifty 50 and BSE 500 borders on 18.50 percent, and the profit after tax (PAT) growth was 7.6 percent and 5.9 percent, respectively. Relatively better performance, as expected, has come from the banking, auto and IT sectors, which reported healthy sales as well as EBITDA (earnings before interest, tax, depreciation and amortisation) growth. The EBITDA margins displayed signs of pressure, in fact, continue to have pressures, a carry forward after the fantastic margin expansion in Q1 of FY21, attained mainly on account of operational efficiencies that were harnessed under extremely difficult business conditions. The compression in EBITDA margins was reported at 43 basis points (bps) for Nifty 50, and 132 bps for BSE 500.
Financial Sector Stands Out
The positive impact of the BFSI (banking, financial services and insurance) sector on overall performance is something that is noteworthy. In fact, the best performance came from banking companies. This performance was facilitated by the pickup in bank credit, which moved up from the lows of 6-7 percent and is perched around 17-18 percent at present. This credit growth came at the most opportune time for banks. The lending rates have been rising while the deposit rates remained relatively low. Usually, it takes about two to three quarters for the deposit rates to catch up with the rate cycle turning on the upside. There has been a pick-up in the net interest margins. This could moderate as liquidity pressures become graver and there is a scramble for funds, which is already playing out in the interbank market. If you consider the ex-BFSI numbers, the BSE 500 EBITDA margin compressed by 255 bps and the PAT growth was at negative 12 percent, quite similar to numbers that are reported for the ex-BFSI Nifty.
Improving demand conditions and a correction in commodity prices favoured the auto sector, but a weaker dollar could bring back some amount of price inflation in commodities. The trajectory of the Dollar Index is crucial in this. Metals and oil & gas remained a drag on the overall earnings. In the immediate term, the sectoral performance may mirror the recent performance with some minor dampeners.
Cloudy Outlook
Earnings are sensitive to GDP growth, in differing proportions for different sectors. National income growth and corporate profitability are positively correlated. As per the projections, the rate of growth is most likely to be in the range of 6 percent to 6.5 percent. This is lower than the 7 percent growth estimated for FY23. The lower growth is a product of the recessionary conditions that have started enveloping major countries like the US, and the core countries in Europe. Conditions in China too are not very different. China is likely to clock a growth rate that could be sub-5 percent. We need to take cognisance of the impact of global developments on external facing or export-oriented businesses. While sectors like technology may show some amount of resilience, others may not.
The impact of persistent inflation on rural demand is already visible and this could be a short-term drag but not much relevant in the long run with the urban and semi-urban demand quite robust at this juncture. Interest rates are moving up and there is more upside for short-term rates. While the reliance of companies on bank funds has come down by about 30 percent for those in the midcap segment, it may still have some impact on the cost of funds. We need to price in some of these factors as they have company-specific and sector-specific implications, and probably much less at the global level.
Growth expectation is such a dynamic thing that as we move into the second half of FY24, there will be better visibility, especially in a fast-growing economy, where government capex which is neutral to economic cycles, may have a multiplier effect through the crowding in of private capex.
