What to expect from the Q3FY23 corporate?

The Q3FY23 results season starts from 09th January and will go on till the middle of February. There are several positives in the quarter. This quarter is likely to see a bounce on the back of strong post-festive sales and a gradual pick-up in demand. At the same time, the headwinds like Fed hawkishness and global inflation still remain. It is in this light that the results for the December 2022 quarter would be announced. Here is what we can look at as some of the key takeaways.

The results will begin with the IT sector and the momentum would actually pick up only in the second half of January 2022. Here is what we broadly expect.

1. As is the general consensus, the pace of revenue and earnings growth is likely to slow down this quarter for the IT sector. For the overall IT sector, the top line growth is likely to come down from mid-teens to around 8%, while margins may show an improvement on the back of reduced employee and operating costs.

2. Most industrial companies are likely to see an improvement in their margins especially with the softening of commodity and other raw material prices. Also, manpower costs are much lower. In the last quarter, cost of funds and cost of raw materials had dented margins. However, cost of funds will continue to be a challenge for India Inc.
    

3. For the Nifty 50 companies overall, the top line revenue growth for Q3FY23 is likely to be subdued due to lower business volumes and weak exports. Also, the supply chain constraints continue to hit most industries and that is preventing companies from operating at their full preferred capacity.
    

4. The good news this quarter could be that the gross margins (margins from the core business) could see a bottoming out. That means, while the gross margins may not jump immediately, a gradual process of bounce could start. This is applicable to sectors like cement, auto and metals too.
    

5. In terms of margin boosters, one can expect the banks to continue to boost margins on the back of robust NII growth and net interest margins. Industrials are the other sector to benefit. Among the losers, metals and cements are likely to see margin pressure as the input cost syndrome is likely to be the most prominent in these sectors.
    

6. The auto and the auto component sector is likely to see margins improve for four wheelers while it is likely to decline for the two-wheelers. In the PV segment and the tractors segment, the volumes are likely to offset the impact of margins. EBITDA boost is also likely to come for these sectors from the lower commodity costs.
    

7. There are several positive triggers for the BFSI segment overall. Credit growth in the December 2022 quarter was at a multi-year high of 17.4%. However, deposit rates have struggled to keep pace with credit growth, which means NIMs could face some impact. Apart from good recoveries, even the NPAs are expected to moderate in Q3FY23.
    

8. Some large brokers expect banks to post 39% growth in earnings and 20% growth in their operating profits. They also expect nearly 20% growth in the net interest income (NII). Loan growth is the big story for banks and they have been the big beneficiaries of the decision by the RBI to maintain its hawkish stance.
    

9. Let us turn to industrials The companies in the industrial segment are likely to report a robust yoy revenue growth of 14% yoy on the back of strong order books and improved project execution. However, the positive impact margins is likely to be largely driven by cost rationalization measures by these industrial companies.
    

10. The big positive surprise is likely to be the hotels segment which could grow to one of its best performance on the back of an improvement in the occupancy rate and the average room rates (ARR). There is a lot of revenge buying likely in the hotels segment, as it is gradually coming out of the COVID related restrictions, being a contact sensitive sector.
     

11. Finally, for the heavyweight Oil & Gas segment, upstream companies could gain from a 40% increase in the APM (administered pricing mechanism) gas rates. However, higher rates of windfall tax will continue to be a dampener. For downstream companies, the subsidy burden will continue to be a major hassle.

One last point must be made on a very strong likelihood of a revival in the rural segment. Though rural India was adversely impacted in the first half, the situation is expected to sharply improve in the December quarter and March quarter due to lower rural inflation and a better than expected rabi cropping season. Overall, the earnings season is expected to be better than Q2.