India's top listed companies may log strong double-digit growth in Q1

India’s top listed companies are once again expected to report strong double-digit growth in earnings in the April-June quarter (first quarter, or Q1) of 2022-23 (FY23), thanks to a low base in Q1 of 2021-22 (FY22) and big jump in earnings of oil and gas majors like Reliance Industries (RIL) and Oil and Natural Gas Corporation (ONGC).

The index companies’ earnings are, however, expected to decline on a sequential basis due to weak demand, decline in commodity prices, and rise in interest rates.

According to various brokerage estimates, the combined net profit of index companies is expected to grow 32.8 per cent year-on-year (YoY) to Rs 1.43 trillion in Q1FY23, against Rs 1.08 trillion a year ago. 

The earnings will, however, be down 8.5 per cent quarter-on-quarter (QoQ), from the record high of Rs 1.57 trillion in the fourth quarter (Q4) of FY22.

Brokerages also expect index companies to report a surge in revenue in Q1FY23, reversing the trend, by virtue of higher inflation and corresponding rise in price realisations.

According to brokerage estimates, the combined net sales of Nifty companies is expected to grow 34.8 per cent to Rs 11.58 trillion in Q1FY23 — growing at the fastest pace in the past four quarters. By comparison, index companies’ net sales were up 22.3 per cent YoY in Q4FY22.

Excluding cyclical sectors, such as banking, financial services, and insurance, oil and gas, and mining and metals, Nifty companies’ combined earnings is expected to rise 27.7 per cent, while their combined net sales is expected to grow 20 per cent YoY in Q1FY23.

The Nifty is, however, dominated by these three cyclical sectors, with 61 per cent share in combined net profit and 56 per cent share in overall revenue.

The analysis is based on Q1FY23 earnings estimates by brokerages, including YES Securities, Motilal Oswal Financial Services (MOFSL), Kotak Institutional Equities (KIE), Elara Capital, Centrum Broking, and Prabhudas Lilladher.

Business Standard analysis is based on the numbers of 47 Nifty companies, excluding Bajaj Finserv, HDFC Life, and SBI Life.

“We expect Q1FY23 net income of the KIE universe to increase 22 per cent YoY, but decline 16 per cent QoQ. The supernormal YoY growth reflects a weak base in most sectors due to the second wave of Covid-19. On a QoQ basis, we expect most sectors to report a decline in net income,” write Sanjeev Prasad, Sunita Baldawa, and Anindya Bhowmik of KIE in their earnings estimate for Q1FY23.

“Given the distorted base in Q1 of 2020-21 and Q1FY22, watch for sequential growth which may dip across the board, barring auto, excluding Tata Motors (improving supply and raw material prices tailwinds), consumer staples (on price hikes), health care, and upstream oil and gas,” write Bhawana Chhabra and Aditya Jaiswal of Elara Capital, in their earnings estimate.

“This indicates that the sequential earnings recovery may be weak, owing to a multitude of factors such as weak margins and muted volume growth,” adds the brokerage in its report.

The numbers suggest that the earnings growth will be highly lopsided with just two companies — RIL and ONGC — accounting for nearly 68 per cent of the incremental jump in the combined net profit of all Nifty companies in Q1FY23 on a YoY basis. Other companies expected to report a big positive swing in earnings include Coal India, Tata Motors, and Bharti Airtel.

On the revenue side, nearly half the incremental growth is expected to be accounted for by RIL and Bharat Petroleum Corporation.

The brokerages, however, expect a sharp slowdown in the earnings growth of metal companies like Tata Steel and JSW Steel and information technology (IT) exporters like Tata Consultancy Services and Infosys.

While metal companies are expected to report double-digit growth in earnings, the combined earnings of IT exporters is expected to grow in low single digits. In contrast, these two sectors were the top contributors to corporate earnings in the past two years.

By comparison, automotive companies, especially four-wheeler makers, are expected to report a jump in earnings in Q1FY23. “After the last three quarters of YoY decline in earnings before interest, tax, depreciation, and amortisation margin, we expect automakers to report an improvement in margins and a 7.7x expansion in profit on a low base,” write analysts at MOFSL.