The banking sector may continue to do well, led by tailwinds of strong credit growth, steady margins, excellent asset quality metrics and lower provisioning expenses, according to Gautam Duggad, Head of Research, Institutional Equities at MOFSL.
As far as the Nifty earnings are concerned, MOFSL expects the fourth-quarter earnings to grow 10-11 percent for the Nifty. The FY24 earnings will be led by some rebound in commodities as well as continued strength in BFSI and automobiles, he shares with Moneycontrol after the recent MOFSL earnings review report for the December FY23 quarter.
With more than 17 years of experience in capital markets, he feels continued weakness in consumption, global growth slowdown, higher interest rates, uncertainties on the geopolitical front and high inflation are the key concerns for corporate earnings in FY24.
How do you read the entire corporate earnings season? Also, are these earnings in line with your expectations?
India Inc’s profitability moderated in the third quarter. Corporate earnings were below our expectations during the quarter dragged by commodities while financials and auto held the fort. Earnings of the MOFSL Universe companies grew marginally by 1 percent YoY (estimates of +8 percent YoY) in Q3FY23 while for the Nifty, earnings growth stood at 11 percent YoY (versus estimates of +14 percent YoY).
The aggregate performance was impaired by a sharp drag from global commodities such as metals and oil and gas, which posted a 63 percent and 19 percent on-year earnings decline. Excluding these, the MOFSL Universe and the Nifty reported a solid 29 percent and 31 percent YoY earnings growth (versus expectations of +27 percent and +26 percent YoY), respectively, fuelled by BFSI and autos.
Was the pain much higher in broader markets than the Nifty earnings?
The pain was higher in wider market due to broad-based slowdown in growth (except for BFSI and auto). Earnings growth of the MOFSL coverage companies grew marginally by 1 percent YoY in Q3FY23, while that for the Nifty grew at 11 percent YoY (mainly fuelled by BFSI and auto).
Since last few quarters now, the pain in broader markets is much higher than Nifty earnings. In fact, even in Q3FY23, profits for our coverage universe, excluding Nifty, was down 18 percent YoY, versus our expectations of 3 percent YoY decline.
Have you seen major upgrade in any particular sector?
Yes. We have seen upgrades in the automobile sector. Nifty Auto profits were upgraded 25 percent in Q3FY23, a significant material upgrade after many quarters. We saw marginal upgraded in Financials as well.
Do you think commodity earnings are weaker than others?
Yes. Metals and oil and gas posted a 63 percent and 19 percent on-year earnings decline, respectively, while cement reported a 28 percent YoY earnings decline.
Do you see strong performance in PSU as well as private banks going forward?
BFSI has done well in the last few years. BFSI profits in the Nifty have expanded from Rs 45,000 crore in FY18 to Rs 2.1 lakh crore in FY23, almost 5x jump in 5 years.
We expect entire banking sector to continue to do well, led by tailwinds of strong credit growth, steady margins, excellent asset quality metrics and lower provisioning expenses.
PSBs have seen strong revival in profits in the recent past after a multi-year weakness and NPA cycle. RoEs for public sector banks have seen sharp improvements and are approaching 15 percent.
What is your outlook for Q4FY23 and FY24 earnings, based on last nine-month earnings?
We expect Q4FY23 earnings to grow 10-11 percent for Nifty. Our expectations for FY23/24 earnings for Nifty is 12 percent/22 percent growth. FY24 earnings will be led by some rebound in commodities earnings as well as continued strength in BFSI and Automobiles.
Ex Commodities, we expect Nifty profits to grow 16 percent in FY24.
Do you see any threat to corporate earnings season in new financial year?
Continued weakness in consumption, global growth slowdown, higher interest rates, uncertainties on geo-political front and high inflation are the key concerns for corporate earnings in FY24.
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