BFSI shines in Q2FY23, lifts overall Nifty EPS

Global markets have found comfort in recently released lower than expected inflation readings with growing expectations of a decline in pace of interest rate hikes by global central banks amid already existing growth concerns. Domestic markets have been outperforming their global counterparts and hit a 52-week high in the current week amid healthy growth prospects domestically. On the earnings side, quarterly earnings in Q2FY23 were at 9%, ahead of estimates wherein Nifty EPS came in at Rs 185/share vs. our estimate of Rs 170/share. It was up 4.5% QoQ, 2.8% YoY. The key outperformance was driven by index heavy BFSI space, especially corporate banks as well as oil & gas, pharma and capital goods domain. In the banking space, key positives were a revival in business growth (~17-18% YoY), improvement in margin (~5-25 bps QoQ) and declining NPA ratio with healthy PCR. The management commentary was upbeat across sectors more so on domestic demand prospects and recovery in margin profile amid a benign commodity price outlook and operating leverage at play. With capex cycle revival under way domestically and increasing acceptance of India as a credible, quality driven manufacturing hub (export opportunity), we stay constructive on overall markets. 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.

Incorporating revised PAT numbers for index constituents post Q2FY23, our forward estimates witness an upgrade of ~1.3%, largely for FY24E. Over FY22-24E, earnings are seen growing at a CAGR of 14.9%. Keeping the same PE multiple, we now value Nifty at 20,000 i.e. 21x PE on FY24E EPS of ₹ 950.

Highlights

• Global & domestic markets rebounded in the recent past amid lower inflation prints and consequent expectations of tapering of interest rate hike cycle by central banks

• RBI increased the repo rate by another 50 bps to 5.9% in September 2022 with total rate hike pegged at 190 bps in the current upcycle

• On the economic parameters front, data points are encouraging in terms of GST collection, auto retails, PV segment order-book and e-way bill generation (7.7 crore in October 2022)

• Vahan registrations for festive driven October 2022 totalled 22.6 lakh units, up 47% MoM and averaged at ~129% of pre-Covid levels vs. 87% clocked in September 2022

• Monthly gross GST revenue came in at a six month high of ₹ 1.52 lakh crore for October 2022 vs. ₹ 1.48 lakh crore in September 2022

• Incorporating the revised estimates, our Nifty earnings undergo an upgrade of ~1.3%. We now value the Nifty at 20,000 i.e. 21x PE on FY24E EPS of ₹ 950/share, keeping the PE multiples intact. Corresponding target for the Sensex is at 66,600. These are our rolling 12 months’ index target

• As structural bets, we like the banking space, capex linked capital goods, domestic consumption plays including autos

Sectoral earnings

Incorporating Q2FY23 results, the BFSI space witnessed healthy earnings upgrade (led by corporate banks) while marginal upgrades were witnessed in the FMCG, IT & oil & gas space.

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