Q3 earnings preview: Revenue growth to be muted due to high base, margins to improve on softening commodity prices

India Inc will start reporting its earnings for the quarter ended December 2022 from Monday (January 9). As has been the trend for the past few quarters, IT heavyweight Tata Consultancy Services (TCS) will once again open the innings. Experts expect the pace of revenue and earnings growth to slow down this quarter compared to the last quarter, with the revenues for Nifty 50 companies expected to grow at 15 percent on-year, while earnings are likely to grow 10 percent year-on-year (YoY).

However, with the softening of commodity/raw material prices, margins for most companies should start looking up.

The slowdown in the pace of growth this quarter is mainly due to the high base effect of last year, when Nifty constituents reported mid-double-digit growth in both revenues and earnings. At the same time, revenues are also seen to be getting impacted due to the impact of diminishing inflation.

During the quarter ended December 2021, the revenue and net profit of Nifty 50 constituents had risen by an average of 23 percent and 31 percent YoY, respectively.

However, in Q2FY2022-2023, revenues rose by 20 percent on-year, EBITDA grew by four percent, and PAT (profit after tax) dipped 1.5 percent.

“In Q3FY2022-2023, we expect topline growth to be subdued on YoY and QoQ (quarter-on-quarter) basis as the effect of inflation begins to wear out, but we expect margins to improve (especially QoQ)”, Deepak Jasani, Head of Retail Research, HDFC Securities, told Moneycontrol.

The upcoming Q3 earnings season is being closely watched for cues on post-festive season demand trends and the impact of a global slowdown. Investors need to closely watch the body language, commentary, and guidance of companies going forward.

“Gross margins  are expected to have bottomed out in Q2FY23 and sequential margin improvement is expected across sectors – mainly cement, auto, metals,” said Devang Mehta, Head – Equity Advisory, Centrum Wealth.

On a YoY basis, however, metals and cement could pull down the overall margins, while banks and industrials could help boost margins.

Auto OEMs and auto component companies are likely to report a marginal sequential decline in revenues, largely due to decline in two-wheeler (2W) and passenger vehicle (PV) volumes, which was partially offset by increased volumes in the tractor segment. EBITDA margins for the segment are expected to improve mainly due to lower commodity prices and improved product mix, partially offset by negative operating leverage.

“In BFSI, credit has seen a robust revival, growing 17.4 percent YoY in Dec 2022 — a nine-year high. Though deposit rates have increased sharply over the past few months, the gap with credit growth still remains large and could impact NIMs (net interest margin) in FY24”, said Jasani. Slippages (NPAs) could continue to moderate, which, along with healthy recoveries, should result in a further improvement in asset quality.

Kotak Institutional Equities expects banks under its coverage to report ~39 percent YoY earnings growth, and ~20 percent YoY operating profit growth. “We expect solid net interest income (NII) growth of ~20 percent YoY on the back of ~17 percent YoY loan growth.”

While the previous quarter saw several banks reporting a net interest margin (NIM) expansion, the number of banks and the quantum of expansion, if any, is likely to be lower this quarter.

Companies in the industrial segment are expected to report a healthy YoY growth in revenues on the back of strong order books and improved project execution.

“We expect 14 percent YoY revenue growth for industrial companies. Margins are likely to improve marginally supported by cost rationalisation and moderation in commodity price inflation”, said a report from Antique Stock Broking.

Experts expect cement companies to report modest EBITDA decline of less than 5 percent on-year after four successive quarters of more than 20 percent YoY decline.

“Volumes of cement companies are expected to see 10 percent YoY (and 8 percent QoQ) growth, which is likely to be offset by lower EBITDA/ton on a YoY basis,” analysts said.

Consumer durables companies are likely to report another subdued quarter due to seasonality, along with subdued overall demand and increased competitive intensity. Consumer demand in the entry-level segment remains under pressure amid inflationary conditions.

Sustained inflation impacted both volume offtake and margins of the consumer staples and discretionary segment. Demand moderation was witnessed in urban markets, while rural markets continued to remain under pressure during the quarter. The volumes of paint companies also witnessed moderation as inflation impacted decorative paints.

“Consumer companies should largely be witnessing muted volume but steady revenue growth driven largely by pricing, even as margins expand sequentially on the back of stable commodity prices,” said Manish Jain, Fund Manager, Coffee Can PMS, Ambit Asset Management.

Hotels could report the healthiest performance vis-a-vis pre-Covid times due to revenge travel resulting in higher occupancy and average room rates (ARR), aided by cost optimisation.

IT services are expected to report a marginal single-digit sequential growth in constant currency terms. Analysts at Kotak forecast a sequential revenue growth of 0-3 percent in constant currency for their coverage universe. “Cross-currency tailwinds will range from 10-60 bps (basis points), and on YoY comparison, we expect revenue growth to moderate to high-single digit to low-teens,” they said.

Experts expect a stable to marginal sequential increase in EBIT driven by depreciation of the Rupee against the Dollar and other currencies, moderation in wages, fading supply-side pressures, and lower sub-contracting costs.

Steel companies are likely to witness low double-digit volume growth on a  low base, and weak exports. Experts expect the profitability of steel companies to increase sharply on a sequential basis in Q3FY23 as lower raw material costs flow through with inventory lag.

The analysts at Kotak estimate ~Rs4,000 per ton QoQ recovery in steel margins in Q3FY23, which will still be almost half of Q3FY22 levels.

It could be a mixed quarter for non-ferrous metal companies. Aluminium companies should see pressure from lower prices offset by lower coal costs and a weak Rupee, whereas the weakness in zinc prices should impact the margins of zinc producers.

For the Oil & Gas segment, analysts expect a better quarter (sequentially) for upstream companies, driven by a 40 percent increase in APM (administered pricing mechanism) gas rates from October 1, 2022, and a modest sequential increase in crude sales volume.

For downstream players, they expect significant QoQ improvement for oil marketing companies, driven by sequentially lower under-recovery on diesel and LPG, over-recovery on petrol sales, elevated middle distillate crack price, and sequentially higher refinery throughput.

Antique stock broking expects pharma companies in its coverage universe to report aggregate revenue growth of ~11 percent on YoY basis driven by Indian formulations and generic Revlimid sales. EBITDA margins are likely to remain flat on a YoY basis on account of higher price erosion in US generics and an increased cost base.

The telecom companies (three private telcos) are expected to witness modest sequential growth in combined wireless revenue, driven by modest 1 percent QoQ ARPU uptick on an improvement in the subscriber mix.

Kotak expects overall wireless EBITDA for the telcos to improve 4 percent QoQ, driven by the residual impact of Spectrum Usage Charge (SUC) savings.

Vodafone-Idea is likely to witness sustained subscriber erosion during the quarter, which spells market share gains for R-Jio and Bharti Airtel.

“High-frequency indicators like peak power demand, recovery in air travel, sales of apparel, quick service restaurants (QSR), auto, housing, capital goods, GST collection, and pick-up in capacity utilisation are positive,” added Mehta.

Though rural India was adversely impacted in the first half, he expects the situation to improve due to a decline in inflation and a decent season for rabi crops. Most of these factors point towards a good earnings season overall.