Q2FY23 Results: Heading in the Right Direction

Indian companies are making a strong comeback. The Quarterly Results tend to set the tone for market direction and help investors to take cognizance of the crucial ground realities. Armaan Madhani analyses Q2FY23 results, highlighting the hits and misses and deciphers the trend for this earnings season 

Market volatility persisted during the July-September quarter owing to diverse headwinds such as aggressive monetary policy tightening by central banks of major world economies in an attempt to tame raging inflation, prolonged geopolitical tensions, upsurge in the US dollar index and the depreciating rupee. The global equity markets witnessed a correction over Q2FY23 with a few even entering the technical bear phase. However, Indian equity markets showed resilience and managed to outperform other markets due to better-than-expected economic growth trajectory and lower level of inflation. With expanding economic activity, softening of key commodity prices and easing supply chain issues, analysts and investors by and large expect Q2FY23 earnings to be buoyant. Let us delve deeper to analyse the Q2FY23 earnings of early bird companies that have declared results and try to discern the trend for companies that are yet to declare their results. 

IT Companies’ Performance

India's largest IT services company, Tata Consultancy Services (TCS), witnessed strong demand for all its services and managed to beat street estimates on profit and growth in Q2FY23. Buoyed by good performances across verticals and geographies, the company’s revenue grew 18 per cent on a YoY basis to ₹ 55,309 crore. The IT giant reported an 8.4 per cent YoY increase in net profit at ₹ 10,431 crore compared to ₹ 9,653 crore in the corresponding year-ago quarter. The total contract value (TCV) for Q2FY23 stood at USD 8.1 billion, marginally lower than USD 8.2 billion recorded in Q1FY23.

The TCS order book is holding up well with a healthy mix of growth and transformation initiatives, cloud migration and outsourcing engagements. The company has announced a second interim dividend of ₹ 8 per equity share. TCS saw attrition for the September quarter at 21.5 per cent, which was higher as compared to 19.7 per cent and 17.4 per cent reported in the June and March quarters, respectively. The company’s workforce saw a net addition of 9,840 employees during the recent quarter.
 

Infosys also managed to beat street estimates for Q2FY23, reporting 11 per cent YoY increase in consolidated net profit at ₹ 6,021crore. The company’s operating margins expanded by 150 basis points sequentially, aided by operational rigour, while supply side pressures eased as attrition cooled off to 27.1 per cent from 28.4 per cent in the June quarter. Infosys’ large deal total contract value (TCV) for the quarter came in at USD 2.7 billion, which is the highest in the last seven quarters. The company’s management has raised its FY23 revenue growth guidance to 15-16 per cent, slightly higher than the previously projected 14-16 per cent band, primarily buoyed by a strong large deals pipeline and good demand momentum despite global macroeconomic concerns. The company declared an interim dividend of ₹ 16.50 per share and also announced a buyback of shares worth ₹ 9,300 crore via open market.
 

Wipro reported a 9.3 per cent YoY decline in its profit after tax (PAT) which came in at ₹ 2,659 crore. However, PAT sequentially grew by 3.72 per cent from ₹ 2563.6 crore reported in the June quarter. Its revenue surged 14.6 per cent YoY to ₹ 22,540 crore. In a press release filed with the exchange, the company’s CFO Jatin Dalal stated, "We achieved margins of 15.1 per cent in Q2 after absorbing the impact of salary increases and promotions. Our margin improvement was led by better price realisations and strong operational improvements in automation-led productivity.”
 

IT major HCL Technologies witnessed a 7.05 per cent YoY increase in its consolidated net profit to ₹ 3,489 crore for Q2FY23. The company’s revenue rose by 19.51 per cent to ₹ 24,686 crore, as compared to ₹ 20,655 crore a year ago. With regard to the future business outlook, the company has raised its revenue growth guidance for FY23 and now expects a 13.5-14.5 per cent jump in revenue in constant currency, compared with 12-14 per cent projected earlier. The company’s board of directors has declared an interim dividend of ₹ 10 per equity share.
 

L&T Infotech, L&T Technology Services, Mindtree, Persistent Systems and Happiest Minds Technologies posted strong results for the quarter ended September 30, 2022. Meanwhile Tata Elxsi and Mphasis disappointed investors with their mixed performance.
 

Sensex Constituents’ Performance
 

Diversified business conglomerate Reliance Industries Limited (RIL) reported a net profit of ₹ 13,656 crore in Q2FY23, marginally lower from ₹ 13,680 crore recorded in the corresponding quarter of the previous year. On a sequential basis, RIL’s profit fell by 24 per cent. However, the revenue for Q2FY23 grew by 33.7 per cent to ₹ 2.32 lakh crore compared to ₹ 1.74 lakh crore in Q2FY22.
 

RIL’s O2C business saw EBITDA decline by 5.9 per cent on a YoY basis to ₹ 11,968 crore in Q2FY23 owing to subdued demand and a weak margin environment across downstream chemical products. The oil and gas business witnessed 3 times jump in quarterly EBITDA. During the quarter, Reliance Retail became the first Indian retailer with over 50 million square feet of retail space. Reliance Jio and Reliance Retail posted record quarterly EBITDA of ₹ 12,011 crore and ₹ 4,404 crore, up by 29.2 per cent and 51.2 per cent YoY, respectively.
 

India’s largest private sector bank, HDFC Bank, reported 22.3 per cent growth in its consolidated profit after tax (PAT) for Q2FY23 to ₹ 11,125 crore, with sharp growth in its net interest income and margin on a YoY basis. The bank’s net interest income (NII) for the quarter surged by 18.9 per cent YoY to ₹ 21,021 crore on the back of more than 23 per cent jump in advances, while the net interest margin (NIM) was stable at 4.1 per cent. Provisions and contingencies for the quarter stood at ₹ 3,240 crore, sharply lower compared to ₹ 3,925 crore in the year-ago quarter. 
 

ICICI Bank, India’s second-largest private sector bank, also reported strong results for the quarter ended September 30, 2022. The bank recorded a net profit of ₹ 7,558 crore in Q2FY23, up by 37 per cent from ₹ 5,511 crore in Q2FY22. Its NII grew by 26 per cent YoY to ₹ 14,787 crore in Q2FY23 as against ₹ 11,690 crore in the same quarter last year, helped by a 23 per cent loan growth and a 0.30 per cent expansion in the NIM to 4.31 per cent. The bank's asset quality improved during the quarter, while both advances and deposits witnessed healthy double-digit growth. Provisions (excluding provision for tax) declined by 39 per cent YoY to ₹ 1,644 crore in Q2FY23 from ₹ 2,714 crore in Q2FY22.
 

Axis Bank put a big smile on investors’ faces by exceeding expectations and delivering all-round stellar quarterly results. The lender reported a consolidated net profit of ₹ 5,330 crore for Q2FY23, which grew by a whopping 70 per cent as against ₹ 3,133 crore recorded in the corresponding year-ago quarter on the back of lower provisions. Its operating profit in the September quarter grew by more than 30 per cent YoY to ₹ 7,716 crore. The NII grew 31 per cent YoY to ₹ 10,360 crore from ₹ 7,901 crore in the last year quarter. Provisions for Q2FY23 were quite lower at ₹ 550 crore relative to ₹ 1,735 crore a year ago. NIM for the quarter under review stood at 3.96 per cent. Kotak Mahindra Bank and IndusInd Bank also reported robust earnings for the September quarter, with both profit and NII growing in double-digits, along with improving asset quality.
 

Bajaj Finance’s net profit for Q2FY23 jumped 88 per cent YoY to ₹ 2,781 crore as compared to ₹ 1,481 crore in the corresponding year-ago period. This was the consumer financiers’ highest-ever quarterly consolidated net profit backed by healthy growth in NII and lower loan loss provisions. During the quarter, its assets under management grew by 31 per cent to ₹ 218,366 crore and NII surged 31 per cent to ₹ 7,001 crore. The company’s customers increased by 19 per cent to 62.91 million in the September quarter, as compared to 52.80 million in the corresponding year-ago quarter. The company is on track to add 10-11 million new customers into its fold in FY23 and expects that by the end of FY23 its customer base will stand at 68-69 million.
 

Hindustan Unilever Limited (HUL), India's largest FMCG company, reported a standalone net profit of ₹ 2,616 crore for the September quarter, a healthy growth of 19.6 per cent from ₹ 2,187 crore reported in the corresponding year-ago period. Its revenue from operations rose 15.9 per cent to ₹ 14,751 crore compared to ₹ 12,724 crore in the same quarter last year. The company’s operating margin contracted by 172 basis points to 22.89 per cent due to higher costs. In a filing with the exchange, Sanjiv Mehta, CEO and MD, HUL, opined, “Demand environment remains challenging with inflation impacting consumption. However, with softening in some commodities and monetary/fiscal measures taken by the government, we are cautiously optimistic in the near-term." 
 

The cigarette-to-hotel-to-FMCG conglomerate ITC reported a robust 24 per cent YoY growth in its consolidated net profit for Q2FY23 at ₹ 4,619.77 crore. This was mainly on account of improving demand for its cigarettes and snacks. The company’s revenue from operations for the September quarter rose 25 per cent to ₹ 18,608 crore on a YoY basis. The revenue from its flagship cigarette segment was up by 23.3 per cent on an annual basis to ₹ 6,953.80 crore. The company stated, "Stability in taxes on cigarettes, backed by deterrent actions by enforcement agencies, enabled continued volume recovery from illicit trade." 
 

For Q2FY23, ITC's agricultural business witnessed a 44 per cent YoY rise in revenue to ₹ 3,997 crore, driven by strong exports of wheat, rice and leaf tobacco. The paperboard and packaging business reported a 25 per cent growth in revenue to ₹ 2,288 crore owing to higher demand across end-user segments and sustainable products portfolio. The revenue from hotel segment skyrocketed by 82 per cent YoY, signaling a sharp recovery in leisure travel. 
 

So far, only 17 out of 30 Sensex companies have reported results for Q2FY23, with majority of them impressing investors by posting better-than-expected earnings. Investors should watch out for the announcement of quarterly results of the remaining 13 Sensex companies in the forthcoming weeks. 
 

I N T E R V I E W 

Pradeep Gupta
Co-founder & Vice Chairman, Anand Rathi Group 

"We expect Indian equities to bounce back given the resilient economy and currency" 

What is your take on the current scenario in equity markets? Do you expect markets to consolidate from here onwards?
 

We witnessed volatility across asset classes, globally and domestically. Among domestic indices, Nifty was down by -3.7 per cent. We are witnessing global economies taking aggressive monetary policy stance as a recourse to combat inflation. This has caused further volatility and strengthened USD to almost two decade high. Going forward, we expect volatility to continue due to global factors of incoming economic data and geopolitical developments.
 

From domestic perspective, we expect the Indian equities to bounce back given the resilient economy and currency. We are witnessing consumption revival and hoping the same to continue to the current festive season, which will give a further boost to domestic consumption-oriented sectors. Post the strong inflows in August’22, FIIs again turned negative in September ’22 to the tune of ~USD 903 million, while DIIs continued to maintain strong fund inflow and were net positive to the tune of ~USD 1.7 billion. FIIs turned net sellers again in the month of September primarily because of surge in US 10-year yields to ~3.9 per cent levels and the dollar index hitting fresh 20-year high. We expect FII flows to remain volatile in the short-term owing to the pace of rate hikes by major central banks.
 

We don’t see substantial movement from current levels given the various global headwinds such as global inflationary environment, geopolitical issues and aggressive monetary policy tightening by most of the major central banks. Hence, we expect Nifty to remain range-bound with short-term volatility.
 

In your view, how has the earnings season fared so far? Will margin pressures persist for select sectors due to rupee depreciation?
 

With improving consumer sentiments, easing raw material prices and green shots of economic recovery becoming visible, we expect the topline earnings growth to likely be more positive than negative. We feel there would be stock-specific opportunities available across market capitalizations and investors should stick to high quality companies with good earnings visibility, irrespective of the companies being from Mid-Cap or Small-Cap segments.
 

Strong credit growth, which is at a decadal high of ~16 per cent, will boost the second quarter earnings for banking sector and we expect the asset quality to improve further due to reduction in fresh slippages. We expect NII and loan growth for all major banks to be quite strong and deliver growth in high teens on a year-on-year basis.
 

Which sectors seem attractive at current valuations?
 

We expect BFSI sector to do really well for the next 3 to 5 years due to India’s promising economic growth outlook and under-penetration of financial services in the country. Other than BFSI, autos and industrial goods are expected to perform well in Q2FY23.
 

Winners & Losers 

JSW Steel reported a consolidated loss of ₹ 915 crore for the quarter ended September 2022, as against a consolidated net profit of ₹ 7,179 crore in the corresponding year-ago period. Performance for the quarter got impacted due to the sharp decline in steel prices in the domestic market, precipitated by the meltdown in global commodity prices. The decline in realizations negated the impact of lower iron ore prices, while higher power and fuel costs adversely impacted the profitability further.
 

Avenue Supermarts, the owner and operator of retail chain stores DMart, reported weak operational performance in Q2FY23. The company’s revenue improved by 36.6 per cent on a YoY basis to ₹ 10,638 crore. Its EBITDA margin contracted 20 bps on a YoY basis to 8.4 per cent from 8.6 per cent. The company's revenue per store improved by 9 per cent on a YoY basis, whereas its revenue per square foot remained 10 per cent lower than the pre-COVID levels of Q2FY20 owing to higher store size and inflationary pressure witnessed across the non-food category.
 

FMCG giant Dabur India reported a 2.85 per cent YoY decline in its consolidated net profit to ₹ 490.86 crore for Q2FY23 from ₹ 505.31 crore reported in Q2FY22. However, its revenue from operations increased by 6 per cent to ₹ 2,986.49 crore during Q2FY23, compared to ₹ 2,817.58 crore recorded in Q2FY22. The company said in a regulatory filing that it continued to demonstrate agility and resilience to deliver steady organic growth in an environment that remains challenging, marked by unprecedented inflation and the consequential impact on consumption.
 

India’s leading fast moving electrical goods (FMEG) company, Havells India, reported that its consolidated profit fell 38.15 per cent to ₹ 187.01 crore for the September quarter, as commodity inflation hit margins. Meanwhile, wires and cables major Polycab India posted strong business performance in Q2, posting highest ever second quarter revenue in the company’s history. Margin expansion was supported by strong growth in exports and judicious price revisions. To quote Inder T. Jaisinghani, Chairman and Managing Director of the company, from a regulatory filing, “Strong domestic economy with structural reforms focused on infrastructure development augurs well for most of our product categories. We remain committed to achieving ₹ 200 billion in sales by FY2026. ”
 

Other Large-Cap stocks that impressed investors and analysts include Federal Bank, IDFC First Bank, Canara Bank, AU Small Finance Bank, Bajaj Auto, Tata Consumer Products and United Spirits. Mid-cap winners this earnings season are PNB Housing Finance, RBL Bank, Multi Commodity Exchange of India, Birlasoft, Garware Technical Fibres, Tejas Networks, Route Mobile, Granules India, Eris Lifesciences, Praj Industries, Sonata Software, Angel One, Delta Corp, Max Financial Services, Shriram Transport Finance Company, IDBI Bank, Tata Communications, Indraprastha Gas, Colgate- Palmolive (India), Oberoi Realty, Clean Science & Technology and Crisil.
 

The mid-cap losers this season include Yes Bank, ICICI Securities, MotilalOswal Financial Services, Nippon Life India Asset Management, HDFC Asset Management Company, Sterling & Wilson Renewable Energy, Finolex Industries, Cyient, Alok Industries, National Standard (India), Indian Energy Exchange and Jubilant Pharmova.
 

The small-cap companies that brought a smile on investors’ faces with stellar results are PC Jeweller, SpandanaSphoorty Financial, ICRA, Jammu and Kashmir Bank, Newgen Software, Tata Metaliks, IIFL Securities, Anant Raj, Oriental Hotels, KPI Green Energy, Best Agrolife, Ganesh Housing Corporation, Shanthi Gears, AnandRathi Wealth, South Indian Bank, Kirloskar Pneumatic Company, Cigniti Technologies, Cartrade Tech, Stylam Industries, Ramkrishna Forgings, Gokaldas Exports, JTL Infra, Wardwizard Innovations and Mobility, Wendt India, Dodla Dairy and Chennai Petroleum Corporation.
 

The small-cap companies that disappointed investors are Zensar Technologies, Quick Heal Technologies, Nazara Technologies, Apcotex Industries, G M Breweries, Vakrangee, Meghmani Organics, Butterfly Gandhimathi Appliances, Sharda Cropchem, Aarti Drugs, Heidelberg Cement India, Sagar Cements, Dhampur Sugar Mills, Tata Steel Long Products, Bhansali Engineering Polymers and RattanIndia Power.
 

I N T E R V I E W 

Siddharth Vora
Head - Investment Strategy & Fund Manager – PMS, Prabhudas Lilladher Pvt Ltd 

"Robust macro indicators suggest strong domestic economic recovery"
 

What is your outlook on equity markets in the short to medium term?
 

I am positive on the broader market given the improving balance sheet of Corporate India and robust macro indicators that suggest a strong domestic economic recovery. Given the recessionary fears, commodity prices are cooling off and could reduce inflationary pressures. Today, India offers one of the best investment opportunities among the developed and emerging markets given that the valuations have turned reasonable amid a strong economic growth outlook driven by government’s efforts to promote manufacturing and investment in public infrastructure. After establishing its leadership in global IT service exports, India can emerge as an important global manufacturing hub on the back of emerging themes such as China+1 and Europe+1. Also supporting our bullish view is the sustained domestic money inflow into equities and a possible reversal of FII selling in the coming quarters.
 

How has the earnings' season been so far? Which sectors have been the hits and misses?
 

The earning’s season has been showing positive variations in the banking sector with estimated numbers for Q2FY23 in terms of revenue, EBITDA and PAT at variations of 2.2 per cent, 4.3 per cent and 5.4 per cent respectively. The consumer sector revenue estimates are in line with the actual at a variation of 0.4 per cent, whereas EBITDA and PAT seem to be a slightly overestimated at variation of 3.6 per cent and 4.5 per cent, respectively.
 

What are the pertinent risks facing equity markets in H2FY23?
 

Some of the downside risks that I foresee include a depreciating rupee, global central banks’ continued hawkish stance on rates, sticky inflation, quantitative tightening and continuing Ukraine-Russia tensions, all of which are key negatives for the markets. Another key downside risk could emanate from the spillover of global recessionary pressures slowing down growth in India, thereby starting an earnings estimates downgrade cycle.
 

Which three sectors would you bet on for the long term?
 

Being a long-only equity PMS, the endeavour is to identify and invest in sectors that will outperform, while consciously eliminating sectors that are less likely to outperform - either due to growth or valuation concerns. According to me, sectors that are likely to outperform are manufacturing, financials and consumer discretionary.
 

Conclusion
 

A strong start to the Q2FY23 earnings season by IT companies and private banks indicates acceleration in corporate profitability in the upcoming quarters. On the whole, companies that are focused on domestic consumption are likely to outperform those that are heavily dependent on exports. The capital goods companies are expected to record healthy revenue growth and stable margins in Q2FY23 amidst low base, uptick in demand, debottlenecking of supply chain and faster implementation of orders. The softening of input costs, easing of supply side issues, price hikes and demand recovery are expected to benefit automotive sector earnings. Meanwhile, metal companies are likely to report weak numbers on account of decline in realisations in the domestic market due to the correction in global commodity prices, rising costs of production and decreasing exports. The weak refining margins and large inventory build-ups could result in the underperformance of oil and gas stocks.
 

The Indian markets are presently in a sweet spot with the growth engine going full throttle. Normal monsoons, softening global commodity prices and anticipated moderation in inflation going forward will help boost margins and market sentiments. There is a very clear visibility of healthy potential demand for the future, which has provided confidence to large corporates to aggressively ramp up their capacities. With equity markets of developed economies witnessing heightened volatility, the Indian equities market presents a huge opportunity for both Indian as well as foreign investors. Investors should focus on fundamentally strong companies trading at reasonable valuations that are delivering strong topline and bottomline performance, coupled with better operating leverage and industry tailwinds.