Earnings for 4QFY22 were in line with MOFSL expectations, despite the global and domestic economic environments grappling with challenges like geopolitical conflict, a surge in energy prices, raw material inflation, chip shortage, monetary tightening, etc.
While the aggregate growth appeared impressive, it was hardly broad-based and driven only by three sectors: BFSI, O&G, and Metals. More than half of the incremental growth was steered by BFSI.
There was a wide divergence between sectors adversely affected by rising raw material prices (Autos, Cement, Consumer Staples and Durables, Specialty Chemicals) and those not directly impacted/benefitted by rising prices (BFSI, Metals, O&G and Technology).
1) Technology – 4QFY22 saw some moderation in growth momentum on high base of 3QFY22;
2) Banking – Robust 4QFY22 earnings fuelled by healthy recovery in loan growth and controlled provisions. NBFCs saw healthy momentum in new business volumes; asset quality improved driven by elevated customer settlements and write-offs;
3) Consumer – Discretionary companies (paints, QSR, , liquor, etc.) delivered strong double-digit top-line growth while most of the staples companies saw single-digit growth due to weak volume growth;
4) Cement – Cost inflation continued to hurt; OPM and EBITDA/t contracted 6pp YoY and 20% YoY, respectively;
5) Automobiles – 2Ws retail demand declined 15-20% while PV demand remained strong and OEM supplies also improved with easing chip supplies. M&HCV demand maintained its momentum and spiked on a high base.
The Nifty EPS for FY23E was reduced to Rs 864 (earlier: INR870) largely due to notable downgrades in
Conversely, FY24E EPS was broadly unchanged at INR1,002 (earlier: INR1,003).
The adverse macroeconomic backdrop with heightened worries on rising interest rates, elevated crude oil prices and liquidity tightening has kept the market volatile and jittery.
Meanwhile, the domestic earnings season continues to remain healthy and provides a silver lining, notwithstanding the challenges faced on multiple fronts.
We expect the full impact of elevated input costs to be felt in 1HFY23 as 4QFY22 had some benefits of lower RM inventory. After the correction, Nifty trades at 19.2x FY23E, at its 10-year average P/E of 19.4x.
We find more value in largecaps than midcaps given the relative valuation equation. That said, we reiterate that earnings delivery is crucial for the market to hold in an adverse milieu of a volatile and challenging macro.
Tata Motors (TP: Rs 485)
should witness a gradual recovery as supply-side issues ease and commodity headwinds stabilize (for the India business). It will benefit from: a) a macro recovery, b) company-specific volume and margin drivers, and c) a sharp improvement in FCF and leverage in both JLR as well as the India business.
The company is leveraging its EV disruption to gain a lead in the electric PV industry. It is looking to further strengthen its position by launching several EVs over the next two-to-three years.
The India business should benefit from a continued demand recovery in CVs and production ramp-up in PVs.
HDFC Bank (TP: Rs 1,850)
appears well-positioned to continue to deliver healthy, sustainable growth, supported by new initiatives and expansion in its digital offerings.
It has delivered strong business growth vs its peers, resulting in constant market share gains. Asset quality ratios remain pristine, while the restructured book remains controlled ~1.14% of loans. Healthy PCR and contingent provisioning buffer provide comfort on asset quality.
We estimate 18%/20% loans/PAT CAGR over FY22-24, with an FY24 RoA/RoE of 2.1%/17.8%. HDFC Bank remains one of our preferred top picks.
We expect the stock to recover gradually as revenue and margin revive over FY23, while further clarity emerges on several aspects related to its merger with HDFC Limited.
(The author is Head – Retail Research, Limited)
(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)
