Daily Voice | BFSI will shine but Cement, Speciality Chem face headwinds, says Motilal Oswal#39;s Gautam Duggad

Market Outlook

Shares of lenders and insurers will shine in Q1FY23, as slippages moderate and asset quality improves further. That’s the view coming from Gautam Duggad, Motilal Oswal’s Head of Research at the Institutional Equities desk.

Speaking to Moneycontrol, Gautam Duggad said that the twin headwinds of sticky inflation and modest demand could hurt earnings growth of sectors where pricing power is low. “So sectors like Cement, Speciality Chemicals, Consumer Durables will see some pressure in our view,” he added. Here’s the conversation:

The broader space hit quite hard in current calendar year. Do you expect the midcap and smallcap segments to underperform benchmarks in rest of calendar year?

Midcap index is still trading at a premium to Nifty. This, coupled with rising rates and tightening liquidity does provide some headwinds for mid/small-caps. Our preference is towards largecaps as we believe they are better placed to withstand the adverse macro backdrop.

Selectively, some bottom-up mid/small-cap ideas can always be invested into, depending on balance sheet strength, quality of the management and earnings visibility.

Have you make significant change in earnings estimates (for Q1 and FY23) for banking sector after Q4 and FY22 earnings?

No, we haven’t. BFSI (banking, financial services and insurance) has been one of the most consistent performers when it comes to earnings delivery.

Between FY18 and FY22, profits of BFSI companies in Nifty have expanded from Rs 45,000 crore to Rs 1.5 lakh crore. We expect this to grow by 25 percent in FY23, led by pick-up in advances, further moderation in slippages and continued asset quality improvement.

What are your thoughts on overall corporate earnings season that has just ended? What are the major likes and dislikes in terms of performance?

Despite the adverse macro-economic backdrop and global concerns on inflation, rates and quantitative tightening, one silver lining for India has been a very resilient corporate earnings delivery in both FY21 and FY22. The Q4FY22 corporate earnings were up 21 percent and our broader MOSL coverage universe each. Nifty’s FY22 earnings were up 35 percent.

Sectors which drove the earnings for Q4 and FY22 both were BFSI, Metals and Oil & Gas. These three sectors accounted for 83 percent of incremental earnings for FY22 YoY. Automobiles also delivered a beat in Q4FY22 after a long time. Sectors which missed our expectations for Q4FY22 are Healthcare, Consumer Durables, PSU Banks.

Global growth concerns battered IT stocks the most this calendar year including midcap IT stocks. As a result, have you revise your earnings estimates (downwards) for IT space? Also what are the stocks to pick in the space?

We made marginal and modest downward revisions to our IT earnings forecast for FY23, ranging from 2-7 percent. We continue to like IT space but our preference is predominantly for largecap, Tier-I Infotech stocks. Good demand visibility, strong balance sheet and excellent cash flow generation coupled with elevated pay-out ratios provide us comfort despite near-term global headwinds.

We expect big tier-I Infotech companies to leverage several margin levers (Off/Onshore mix, pyramid rationalisation, better utilisation, sub-contractor cost management) to manage margins.

What are the sectors that could continue seeing earnings pressure in Q1FY23, and why?

Sectors where pricing power is low will be challenged in the near term, given the twin headwinds of elevated input cost inflation and modest demand. So sectors like Cement, Speciality Chemicals, Consumer Durables will see some pressure, in our view. Even commodity sectors, after a stupendous earnings delivery for last two years, may see some moderation depending on underlying movement in commodity prices.

Also can you name the sectors that could see robust earnings growth despite global growth worries and other concerns, in Q1FY23 and why?

We expect BFSI sector to continue to do well, led by pick up in credit growth, moderation in slippages and improvement in asset quality metrics. Large banks with strong liability franchise, good CASA accretion and higher proportion of floating loans will be key beneficiaries of rising interest rates ahead.

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