Earnings Review: Muted Q1FY23 show; drop in commodity prices to benefit; Nifty target revised upwards to 19,425!

What’s Buzzing: 

Corporate earnings for April-June 2022 (Q1FY23) came in muted. Topline growth at the Nifty level (ex-financials) was at 3.3% QoQ. Operating profit, however, was down 7.2% QoQ factoring in pressure on margins, which for the quarter was at 16.2%, down 184 bps QoQ. Gross margin decline came in sharp at 280 bps QoQ. PAT in Q1FY23 was down 16.8% QoQ, primarily tracking a decline in margins as well as lower other income (as most companies reported MTM loss on investment book due to rise in yields), further aggravated by higher effective tax rate (29.5% in Q1FY23 vs. 26.1% in Q4FY22). At the Nifty level (including financials), broader sequential trend continued with 1.4% QoQ growth in topline while PAT was down 13% QoQ, a tad lower than ex-financials subset (16.8% QoQ) on account of outperformance by the BFSI domain wherein asset quality trend continued to improve led by healthy recoveries and steady incremental slippages. 

Context: 

The recent cool off in key commodity prices viz. metals, crude among others comes as a breather for global equity markets, which are currently wary of ongoing geopolitical issues and interest rate hikes by central banks to control inflation. The management commentary is upbeat on demand prospects and recovery in margin profile amid muted corporate earnings for Q1FY23, which witnessed low single digit QoQ growth in topline and double digit bottom-line decline. Nifty EPS for Q1FY23 came in at ~Rs 177/share, down 14% QoQ. Domestically, with a capex cycle revival on the anvil (public + private) coupled with strong consumer demand across most categories (passenger vehicles, retail, etc), Indian markets witnessed a smart recovery and were up ~14% from recent lows. 

Our Perspective: 

Domestically, on the economic parameters front, data points are encouraging in terms of GST collection (monthly GST collection came in at a three month high of Rs 1.5 lakh crore for July 2022), PV sales order-book and e-way bill generation (four-months high of 7.6 crore in July 2022). Incorporating revised PAT estimates post Q1FY23, our forward Nifty earnings estimates at the aggregate level witness a decline of ~2%. Over FY22-24E, albeit on a high base, Nifty earnings are seen growing at a CAGR of 13.3%. We now value the Nifty at 19,425 i.e. 21x PE on FY24E EPS of Rs 925 wherein we marginally increase our PE multiple to 21x vs. 20x earlier tracking cool-off in commodity prices and consequent positive impact on inflation and resultant modest rate hike velocity by central banks vs. the aggressive stance depicted earlier. Corresponding target for Sensex is at 64,700. These are our rolling 12 months’ index targets. We remain constructive on the overall markets and believe the present market offers an attractive risk-reward play to build a long term portfolio of quality companies, which have lean balance sheets, are capital efficient in nature and have growth longevity.