Margin recovery takes centre stage in Q3FY23; Nifty target retained at 21,500!

What's Buzzing 

On an aggregate basis (ex-financials), the Nifty topline for Q3FY23 was largely flat QoQ at Rs 13.4 lakh crore with EBITDA up 16% QoQ at Rs 2.3 lakh crore and PAT by 16.6% QoQ at Rs 1.1 lakh crore. Margin recovery was the key highlight for Q3FY23. Nifty operating margins (ex-financials) rose 230 bps QoQ to 17%, primarily led by savings realised from lower raw material costs as gross margin expanded 230 bps QoQ. This is post a low of 14.7% margin recorded in the last quarter (Q2FY23). 

Context 

Including financials (BFSI), at the Nifty level, the trend was similar with 1.6% QoQ growth in topline & 13.8% QoQ growth in PAT. On a YoY basis, however, it outperformed the ex-financials subset due to healthy double digit credit growth and further improved the asset quality in the banking space. In the banking space, loan growth remained healthy at 15.3% YoY at Rs 132 lakh crore (as per RBI). The asset quality trend continued to improve with GNPA ratio at the industry level declining ~60 bps QoQ at ~4.6%. Even on an absolute basis, GNPA fell 9.1% QoQ, 19.9% YoY. 

Our Perspective 

Global and domestic markets recovered meaningfully post the interim low in September 2022 end primarily driven by easing inflation and consequent moderation in pace of interest hikes by central banks. A growth oriented Union Budget 2023-24 amid no major tweaks in the capital gain tax regime also kept domestic markets buoyant. The government proposes to spend a record Rs 10 lakh crore (3.3% of GDP) as capex in FY24E (up 33% YoY) with a tangible multiplier effect, which could potentially drive broad based economic growth. Encouragingly, the government ensured that growth capex was bundled with the path of fiscal consolidation. On the earnings side, Nifty EPS for the quarter came in at Rs 205/share, an outperformance of ~5% vs. our expectations. It was up 11% QoQ, 8% YoY. Outperformance was witnessed across the auto, capital goods, FMCG and pharmaceuticals space while the metals and oil & gas space underperformed. Management commentary was more upbeat on domestic demand vs. exports given the global macroeconomic uncertainty. With a progressive Union Budget, capex cycle revival and healthy credit growth & asset quality in the banking space, we retain our positive stance on domestic markets. Incorporating revised PAT numbers for index constituents post Q3FY23, our forward estimates do not undergo any major change. Over FY22-25E, Nifty earnings are seen growing at a CAGR of ~15%. We retain our Nifty target at 21,500 valuing the index at 21x PE on FY24-25 average Nifty EPS of Rs 1020. We believe any dips should be used to build a long term portfolio of quality companies that have lean balance sheets, are capital efficient in nature and possess growth longevity. As structural bets, we continue to like the banking space, capex linked capital goods and domestic consumption plays including autos.