Q3 FY23 Results Review - Modest Quarter; Dragged By Global Cyclicals: Motilal Oswal

Motilal Oswal Report

Corporate earnings for Q3 FY23 were below our expectations led by weak demand environment and macro headwinds, with financials and autos holding the fort once again. Slowdown in consumption is a material concern if trends don’t reverse immediately. Markets are trading flat year-to-date and valuations are in the fair zone with Nifty trading at ~18 times FY24E earnings per share and thus offering room for modest upside if corporate earnings do not see material downgrades ahead. We prefer banking, financial services and insurance, IT, industrials, auto and cement while we are under weight on energy in our model portfolio.

Key sectoral highlights –

• Technology: in-line quarter for IT companies despite the challenging macro environment and easing supply headwinds. After six consecutive quarters of underperformance versus tier-II, the tier-I companies’ revenue growth has outpaced the tier-II pack within our coverage universe.

• Banks: reported a resilient Q3 FY23 fueled by healthy loan growth, robust margin expansion, and consistent asset quality improvement. Growth trends were broad-based, with the corporate segment too exhibiting a strong recovery. Public sector banks posted an improvement in their operating performance driven by strong 3-6% QoQ loan growth across banks amid a sharp recovery in the corporate segment.

• Automobiles: volumes in Q3 FY23 grew YoY across segments, except two-wheelers. Healthy volume growth was underpinned by improvement in the supply of semiconductor chips and strong order book, especially in case of passenger vehicles.

• Consumer: The overall performance of our coverage universe was mainly driven by , as volume growth remained soft. During the quarter, commodity costs showed signs of stabilization (albeit at high levels in some cases) or decline in some cases, and with the full effect of price hikes kicking in, a few companies reported gross margin expansions too.

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