Q1FY23 Preview: Banks to outshine, metals may disappoint, say analysts

Amid weakening consumer confidence and flaring inflation, analysts say that the corporate earnings this quarter will be a mixed bag, with select pockets like banks being the frontrunners.

Amid eroding consumer confidence and flaring inflation, India Inc will kick-start its April-June quarter (Q1FY23) earnings season this week. The period assumes significance as investors will watch out for the full-fledged impact of the Ukraine-Russia war, and the subsequent cost inflation. Corporate profits moderated even in the January-March (Q4FY22) quarter on the back of record high commodity prices. 

While India Inc was able to show resilience in terms of topline growth, profitability margins for many sectors such as FMCG, and IT were significantly impacted in the preceding quarter. And, the geopolitical tensions have not ceded since then, keeping commodity prices volatile.

Against this backdrop, analysts say that the corporate earnings this quarter will be a mixed bag, with select pockets like banks being the frontrunners.

VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services believes that among financials, leading banks, NBFCs including home loan, auto finance companies, and fintech firms will report healthy numbers. 

This is due to the fact that there is an impressive credit growth in the economy, and this momentum will likely sustain, he said.  

Experts also expect the IT pack to continue its robust performance on the revenue front but believe that margins will continue to be pressured as high employee costs due to rising attrition remains an overhang.

Another winner is likely to be the auto industry, which is now emerging from the long-standing woes of semiconductor shortage.

"Margins of auto original equipment manufacturers (OEMs) and ancillary companies are expected to improve due to the recent price hikes in the industry and declining raw material costs such as steel and aluminum," said Narendra Solanki, Head Fundamental Research, Anand Rathi.

Apart from these, specialty chemicals, and manufacturing-related companies look attractive from a valuation perspective, he added.

That said, companies in the consumer space are expected to post muted performance on volumes, with their margins likely to be subdued due to a lack of pricing power for passing on costs, analysts said.

Among industrials, metal companies are likely to post disappointing numbers, as prices of metals have seen a decline during the last quarter.

Moreover, a slew of earnings downgrades have hit the metals and oil companies after the centre imposed and raised export taxes and duties on steel, iron ore, and petroleum products, and introduced a windfall profit tax on crude oil producers in a bid to generate additional revenues.  

These measures, believes Kotak Institutional Equities, will hurt corporate sector profits, market capitalization, and India’s overall investment climate going ahead.

"The bulk of the earnings reduction over the past two months for the Nifty50 index has come from the government’s decision to levy new taxes on the metals & mining and oil, gas & consumable fuel sectors. The new taxes are particularly deleterious since they are on revenues and thus, have a disproportionate impact on earnings," it said in a note.  

The brokerage expects FY23 net profits for the metals, and oil & gas sector in Nifty to be 34 per cent and 12 per cent lower, respectively, from late April.