Q3FY23 Positive for the Markets

Even amidst volatility across the globe, India has retained a firm footing on the growth graph that has steadily been rising without any major hiccups. Armaan Madhani takes a look at the results of Q3FY23 in various sectors to see how the companies are faring on the financial front 

The Indian economy is presently in a sweet spot with the growth engine going full throttle. 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 improving economic activities, moderation in inflation, softening commodity prices, easing supply chain issues and recovery in demand witnessed over the last few months, analysts and investors by and large expect the December quarter financial performance to be buoyant, which is expected to drive stock-specific action in the markets. Let us delve deeper to analyse the Q3FY23 earnings of companies that have declared their results. 
 

IT Companies’ Performance


India’s largest IT services company, Tata Consultancy Services (TCS) reported a profit of ₹ 10,883 crore in Q3FY23 as against ₹ 9,806 crore in Q3FY22, a 10.98 per cent jump year-on-year (YoY). On a sequential basis, the company’s profit jumped by 3.99 per cent. TCS posted a 19 per cent jump in its revenue at ₹ 58,229 crore. On a sequential basis, the revenue was up 5.2 per cent. The total income of the company stood at ₹ 50,833 crore, rising by 18.02 per cent YoY. The company secured deals worth USD 7.5 billion in the December quarter, which was slightly lower than what it was in the preceding two quarters. Attrition rate for the quarter ending December 31, 2022, inched lower to 21.3 per cent. 

IT major Infosys reported a 20.2 per cent YoY rise in consolidated revenue for the quarter ended December 2022 to ₹ 38,318 crore. Consolidated net profit for the quarter rose 13.4 per cent YoY to ₹ 6,586 crore. The company posted a 20.2 per cent rise in consolidated revenue to ₹ 38,318 crore on an annual basis. During the quarter, constant currency revenue growth was strong at 13.7 per cent on an annual basis and 2.4 per cent sequentially. Infosys won deals worth USD 3.3 billion, the strongest in the last eight quarters. The company’s management raised its constant currency (CC) revenue growth guidance for the current financial year to 16-16.5 per cent from 15-16 per cent earlier.

HCL Technologies reported a higher-than-expected profit for the December quarter helped by strong deal wins, but lowered its full year revenue view citing seasonal challenges in the fourth quarter. India’s third-largest IT exporter reported 19 per cent YoY growth in consolidated net profit to ₹ 4,096 crore. Revenue for the quarter grew nearly 20 per cent annually to ₹ 26,700 crore. HCL won 17 large deals during the quarter – seven in the services segment and 10 in software. The total contract value of new deal wins was at USD 2.35 billion, up 10 per cent YoY. 

Its attrition for the last 12 months came in at 21.7 per cent, lower than 23.8 per cent recorded in the September quarter. Wipro declared a 2.8 per cent YoY rise in net profit at ₹ 3,052.90 crore compared with ₹ 2,969 crore in Q3FY22. Revenue for the quarter came in at ₹ 23,229 crore, up 14.35 per cent over ₹ 20,313.60 crore in the same quarter last year. The IT major guided for 11.5-12.0 per cent growth in IT services’ revenues in constant currency terms. For the quarter, Wipro closed 11 large deals resulting in a total contract value (TCV) of over USD 1 billion, up 69 per cent annually. 

The company’s revenues from its top five clients grew 15.7 per cent YoY and top 10 clients 14.7 per cent YoY in constant currency terms, underscoring deepening relationships with top strategic clients. Voluntary attrition eased by 180 basis points from the previous quarter, coming in at 21.2 per cent for the trailing 12 months for the December quarter. LTI Mindtree, Tata Elxsi, Mphasis, Coforge, Persistent Systems, KPIT Technologies and Happiest Minds Technologies posted strong results for the quarter December 31, 2022. Meanwhile, Tech Mahindra and L and T Technology Services disappointed investors with their quarterly financials.
 

Banking Companies’ Performance

Impressive growth in credit, enhancing margins, rising interest rates and improving asset quality have helped banking stocks across the board deliver robust earnings for Q3FY23. Let’s take a look at the financials of the country’s leading banks. India’s largest private lender, HDFC Bank beat the street estimates by reporting an 18.5 per cent YoY rise in net profit for the quarter ended December to ₹ 12,259 crore. Net interest income in the quarter increased nearly 25 per cent on-year to ₹ 22,988 crore. Strong growth in net interest income and lower provisions aided the bottom-line of the lender. Operating profit increased by 13.4 per cent YoY to ₹ 19,024 crore. 

The capital adequacy ratio for Q3FY22 was at 17.66 per cent compared with 16.92 per cent a quarter ago and 19.53 per cent a year ago. The bank’s asset quality was stable from the previous three months with its gross non-performing assets (NPA) ratio unchanged at 1.23 per cent and the net NPA ratio unchanged at 0.33 per cent. ICICI Bank also managed to beat street estimates by posting a 34 per cent jump in its standalone profit at ₹ 8,312 crore for the quarter ended December 2022, helped by healthy growth in net interest income. The bank had posted a net profit of ₹ 6,194 crore in the same quarter last year. The bank’s net interest income (NII) increased by 34.6 per cent to ₹ 16,465 crore in Q3FY23 from ₹ 12,236 crore reported in the same quarter previous year. 

On the asset quality front, the bank recorded an improvement with gross NPAs (non-performing assets) declining to 3.07 per cent as compared to 3.19 per cent quarter-on-quarter and net NPAs also eased to 0.55 per cent as against 0.61 per cent in the previous quarter. Kotak Mahindra Bank’s net profit grew by 31 per cent to ₹ 2,792 crore in Q3FY23 as compared to ₹ 2,131 crore in the same quarter a year ago. The net interest income (NII) of the bank at ₹ 5,653 crore translates to growth of over 30 per cent year-on-year from ₹ 4,334 crore in Q3FY22. Axis Bank reported a net profit of ₹ 5,853.1 crore for the Q3FY23 period, a jump of 61.9 per cent compared with the corresponding period a year ago. 

Net interest income rose 32 per cent YoY and 11 per cent QoQ to ₹ 11,459 crore on the back of a strong 15 per cent loan growth and an expansion in net interest margins. Net interest margins of the bank were at 4.26 per cent, improving by 73 and 30 basis points on an annual and sequential basis, respectively. India’s biggest government-owned lender, State Bank of India (SBI) reported a 68.5 per cent year-on-year surge in net profit for Q3FY23. The bank reported standalone net profit of ₹ 14,205 crore in Q3FY23, its highest ever in a quarter, as against net profit of ₹ 8,432 crore in Q3FY22. SBI’s net interest income stood at ₹ 38,069 crore. This was 24 per cent higher than NII of ₹ 30,687 crore as reported last year. The net interest margin for the lender increased 29 basis points YoY to 3.69 per cent.
 

Sensex Constituents’ Performance

Diversified business conglomerate Reliance Industries Limited (RIL) reported a 15 per cent YoY fall in consolidated net profit for the quarter ended December 2022 to ₹ 15,792 crore, mainly due to volatility in global crude prices during the October- December period as well as higher interest and depreciation expenses as the company undertook expansion in its retail and telecom businesses. Revenue increased 15.3 per cent on-year to ₹ 2.20 lakh crore. Consolidated revenue of the company’s mainstay oil-to-chemicals (O2C) business increased 10 per cent on-year to ₹ 1.44 lakh crore. Jio Platforms registered a 21 per cent YoY growth in revenue to ₹ 29,195 crore. 

This was the highest-ever quarterly sales. Operating profit of ₹ 12,519 crore too was at a record high, exhibiting a YoY growth of 25 per cent. India’s largest fast-moving consumer goods company, Hindustan Unilever Limited (HUL) reported that its standalone net profit for Q3FY23 rose 11.6 per cent YoY to ₹ 2,505 crore, helped by an increasing demand for its beauty and personal care products as well as price hikes in specific categories, which offset a rise in raw material costs. The company recorded double-digit revenue growth of 16 per cent at ₹ 14,986 crore as against ₹ 12,900 crore in the year-ago period. Domestic volume growth for the quarter stood at 5 per cent. HUL sustained its strong momentum and had yet another quarter of solid all-round performance. 

HUL’s Chairman and Managing Director Sanjiv Mehta said, “We are cautiously optimistic in the near term and believe that the worst of inflation is behind us. This should aid in a gradual recovery of consumer demand.” Bajaj Finance reported a 40 per cent YoY rise in consolidated net profit for the December quarter, backed by healthy growth in net interest income and lower bad loan provisions. The net profit was at ₹ 2,973 crore as against ₹ 2,125 crore in the year-ago period. Net interest income for the third quarter rose 24 per cent YoY at ₹ 7,435 crore against ₹ 6,005 crore earlier. The asset quality of the nonbanking lender improved with gross non-performing assets falling to 1.14 per cent at the end of December against 1.73 per cent a year ago. 

Larsen and Toubro reported a 24.24 per cent YoY rise in net profit at ₹ 2,552.92 crore for the December quarter compared with ₹ 2,054.74 crore in the same quarter last year. Revenue for the quarter came in at ₹ 46,390 crore, up 17 per cent, aided by improved execution in the infrastructure projects’ segment and continued growth momentum in the IT and TS portfolio. The company said it received orders worth Rs 60,710 crore at the group level for the quarter, up 21 per cent annually. International orders stood at ₹ 15,294 crore for the quarter, accounting for 25 per cent of the total order inflow. The consolidated order book of the group stood at ₹ 386,588 crore as on December 31, 2022. 

India’s largest carmaker, Maruti Suzuki India’s net profit for the December quarter more than doubled on a YoY basis to ₹ 2,351 crore. Revenue from operations increased nearly 25 per cent on-year to ₹ 29,044 crore and was also higher than the estimated ₹ 27,162 crore. Sequentially, the bottom-line increased by 14 per cent but the top-line fell by nearly 3 per cent. 

Improved realisation, favourable foreign exchange variation, softening commodity prices and cost efficiencies led to a sharp improvement in margins and offset the higher sales promotion expenses incurred during the quarter. Automotive major Tata Motors posted its first quarterly profit of ₹ 2,957.71 crore in two years on rising demand for passenger cars as well as medium and heavy commercial vehicles. Consolidated revenue from operations rose 22.5 per cent YoY to ₹ 88,489 crore. 

The company’s luxury carmaker arm Jaguar Land Rover Automotive Plc (JLR) reported strong 28 per cent growth in revenue to 6.04 billion pound sterling. JLR delivered on its plans and achieved positive free cash flow and profitability in the quarter as supplies improved. The healthy rise in revenue reflects better supplies, a strong model mix and proper pricing. UltraTech Cement failed to meet the street’s profit estimates by reporting a 38 per cent on-year drop in its consolidated net profit at Rs 1,058.20 crore in the December quarter. Its revenue from operations, however, rose 19.5 per cent YoY to ₹ 15,520.93 crore. The company’s operating margin dropped to 15 per cent in Q3 from 19 per cent in the year-ago period but was up 100 basis points sequentially. 

Volume growth was strong during the quarter but cost pressures resulted in subdued margins. India’s largest branded jewellery maker, Titan Ltd. saw its profit dip 4 per cent YoY to ₹ 951 crore in Q3FY23, missing street estimates. Sales during the quarter rose 11 per cent to Rs 10,444 crore as compared to ₹ 9,381 crore in the same quarter last year. “The quarter witnessed strong festive consumer demand and we delivered healthy double-digit growth of 12 per cent over a strong base of last-year quarter,” said the company’s Managing Director C K Venkataraman in a filing with the exchange. So far, 26 out of 30 Sensex companies have reported results for Q3FY23 with majority of them impressing investors by posting better-thanexpected earnings. 

"We Continue to Maintain a Positive Stance on the Long-Term Prospects"

Pradeep Gupta, Co-Founder and Vice-Chairman, Anand Rathi Group
 

How has the earnings’ season been so far? Which sectors appear well-positioned to you for the coming quarters?

The earnings’ season kicked off on a muted note. Out of the 50 companies in Nifty 50, 32 companies have declared the results and so far the results have been muted or in line with the subdued expectations set earlier. Speaking of sectors, we have been witnessing bottoming out in the IT sector and there have been some signs of marginal improvement in the same. The corporate sector has been showing muted top-line with the margins improving. The banking sector has shown healthy credit growth with the NPAs in control. 

However, looking as we are at the end of the rate hike cycle, expectations of a drop in growth may hover over them with the results already pricing in the same. Consumption in the rural sector has not picked up as expected, yet there are pockets where growth is expected. Urban consumption is losing momentum with regards to year-on-year growth numbers. The manufacturing sector is building on the momentum it gained after emerging from the pandemic and is surpassing expectations. However it continues to face supply chain issues, including bottlenecks, global logistics backlogs and cost pressures. Chemicals have shown a mixed bag performance with muted growth. 

Metals have shown no new negative news – it has been neutral to positive and we can expect further improvement. With regard to the automotive sector, the two-wheeler segment continues to show poor growth whereas the four-wheeler segment, especially the mid SUV and the SUV range, is doing very well. We expect the pent-up demand to phase off and the subsequent quarters may show the actual demand in this category. We believe that investors should assess a company’s long-term potential rather than basing investment decisions solely on quarterly performance. They should look at the fundamentals over a longer duration timeframe.
 

What’s your outlook on the domestic equity markets in the short to medium term?

Nifty has corrected by almost -3.18 per cent since January 2 till date. This is also due to the high degree of volatility which is surrounding the Adani Group of companies. Adani Ports and Special Economic Zone holds about 0.54 per cent weight in the total Nifty 50 allocation and the stock price and since the time the Hindenburg report was released on January 25 the stock price has taken a sharp fall to almost -39.67 per cent and YTD at -44.02 per cent. We expect short-term volatility to persist. 

However, we continue to maintain a positive stance on the long-term prospects, especially post the Union Budget 2023 and the focus displayed on achieving a balance between fostering economic development and retaining fiscal consolidation while relieving taxpayers, ushering in healthy revenue growth and favouring investment-led growth without discouraging consumption. The budget has concentrated on sustaining India’s ascent in the global economic order at a time when the world economy is traversing a rough patch. India is rightly being seen as the brightest beacon of hope.
 

Which major emerging investment trend do you expect to dominate over the next decade?

We are positive on the manufacturing sector.
 

Winners and Losers

Large-Cap stocks that impressed investors and analysts this earnings season include Bank of Baroda, IDFC First Bank, Canara Bank, Federal Bank, Shriram Finance, Union Bank, Bank of India, Solar Industries, Polycab India and Sona BLW Precision Forgings. Some large-cap companies that failed to deliver impressive results include Divis Laboratories, Vedanta, Indus Towers, ACC, GAIL (India), Atul, JSW Energy, Relaxo Footwear, Aarti Industries and SBI Cards and Payment Services. The Mid-Cap winners this earnings’ season are Ujjivan Small Finance Bank, ZF Commercial Vehicle Control Systems India, Great Eastern Shipping Company, Chalet Hotels, Shoppers Stop, Route Mobile, KRBL, Mahanagar Gas, Clean Science and Technology, Lakshmi Machine Works, Edelweiss Financial Services, Westlife Foodworld, Apar Industries, Mazagon Dock Shipbuilders and Sterlite Technologies. 

While mid-cap losers this season are Jubilant Pharmova, KEC International, Welspun India, Sterling and Wilson Renewable Energy, Alok Industries, Network 18 Media and Investments, TV18 Broadcast, Crompton Greaves Consumer Electricals, Intellect Design Arena, Welspun Corp, Mahindra Holidays and Resorts India, V-Guard Industries, Birlasoft and Zydus Wellness. The Small-Cap companies that brought a smile to investors’ faces are Manorama Industries, Dodla Dairy, L G Balakrishnan and Bros, Choice International, Agro Tech Foods, Butterfly Gandhimathi Appliances, NELCO, Kabra Extrusion Technik, Man Infraconstruction, Hemang Resources, Sunshield Chemicals, India Cements, Kriti Industries (India), Gabreil India, Aban Offshore, Lloyds Steels Industries, Sterling Tools and ADC India Communications. The small-cap companies that disappointed investors are Lakshmi Mills Company, Super Sales India, Max Ventures and Industries, Privi Speciality Chemicals, Resonance Specialities, S H Kelkar and Company, P H Capital, Aro Granite Industries, Ramco Systems, Astec Lifesciences, Indian Metals and Ferro Alloys, Greenpanel Industries, Aarti Drugs, Ramco Industries and Kalyani Steel.

Conclusion 

A strong start to the Q3FY23 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 uptick in demand, debottlenecking of supply chain and faster implementation of orders. 

The senior management of most companies seem optimistic with respect to their future demand outlook for the upcoming quarters. The recent fall in Indian equity markets over the last few weeks furnishes an optimal opportunity for investors to accumulate fundamentally strong mid-cap and small-cap stocks trading at reasonable valuations that are delivering strong top-line and bottom-line performance, coupled with better operating leverage and industry tailwinds.