8 mins read . 24 Apr 2023
The results of the fourth quarter ended March 2023 and the full year FY23 has just started coming in. There have been some big numbers already. In the IT space, TCS was neutral while Infosys gave very cautious guidance. HDFC Bank showed positive traction in the form of higher growth rates and lower NPAs. The big surprise in the quarter came from Reliance Industries, where the top line growth was tepid, but the profit growth was strong across its three key verticals viz. O2C, retail and digital.
But, there is still much of India Inc still to report results and the results will continue well into May, being the annual filing too. In terms of broad themes, geopolitical tensions are still high, interest rate hikes have been sharp and there are distinct signals of a slowdown in domestic consumption in India. In the previous two quarters, the pressure was evident on the top line and the bottom line, but the results were better than expected. How does the fourth quarter of FY23 promise to pan out for Indian companies?
Thematically, the focus for most companies in the fourth quarter is likely to be on profits and on profit margins, rather than on the top line. Domestic demand has been tepid, rural incomes have been under pressure while export demand has been under stress due to the fears of a global slowdown. Broadly, the BFSI sector and the auto sector are likely to report good numbers in the fourth quarter while metals and IT are likely to lag behind. Here is a sector-wise view of the Q4FY23 expectations.
The passenger vehicles (PV) segment has seen robust numbers for the last few months in succession. Among the big listed names, JLR is expected to drive the top line and the bottom line growth for Tata Motors. Among other specific segments of the auto segment, the positive contributions to earnings are likely to come from tractors, domestic two-wheelers, and medium and heavy commercial vehicles. On the downside, there could be some pressure coming from higher interest rates and pressure on exports, especially for stocks like Bajaj Auto, which are predominantly export driven. However, moderating input costs should help the auto bottom lines tide over these problems.
The banking, and financial services will continue to show a good quarter followed by the insurance space. For insurance, the payouts would be much lower on a yoy basis and that would boost profits. For the banks, the big story in the last two quarters has been that loan yields have grown much faster than the cost of deposits. That trend will hold for Q4FY23, although much of the low-hanging fruits are already gone. However, the NII growth is likely to be robust for most banks and NBFCs while the PSU and private banks are likely to see a discernible improvement in the net interest margins (NIMs). Would there be concerns on the bond write-off front, especially for the PSU banks. That could be an issue and that would be more of a policy decision to be taken.
For the FMCG sector, Q4FY23 could be another quarter of good profit growth, although top line growth will still struggle. We have to wait for the bellwethers like ITC, Hindustan Unilever, and Britannia for the early trends. Rural sales are likely to be flat to marginally positive and that will have an impact on the top line growth. However, most of the FMCG majors are likely to see a sharp improvement in the gross margins in the quarter on account of sharply lower raw material costs. This is true of agricultural raw material and crude oil; both of which are key inputs for the FMCG space. Volume growth may still be in single digits in the quarter, largely led by the urban demand in the quarter. Marketing and advertising expenses are likely to pinch the performance marginally a tough quarter.
If the early numbers from the IT space are any indication, the pressure looks all set to continue. Some of the biggest markets for IT services like the US, UK and EU are likely to see weak demand. The banking crisis is most likely to manifest in Q1FY24 than in the fourth quarter. However, the impact of tech spending weakness will be a major challenge and that is already visible in the conservative sales growth (CC) given by companies like Infosys and HCL Technologies. Despite lower attrition, the operational costs for most IT companies will be higher. Combined with lower margins on IT projects, the impact is visible on the muted operating margin guidance given. Expect multiple headwinds to play out in IT.
If the RIL results are anything to go by, there have been contrasting cues from the downstream oil space and the petchem space. That is likely to be true for most oil companies. Broadly, for the upstream oil companies, the realizations on a per barrel basis would be muted at best. The results would be a lot more complicated for the downstream players due to contrasting pulls like oil price volatility, OPEC policy, inventory losses, lower feedstock costs etc. In short, it would be a volatile quarter for the oil sector.
To sum it up, FY23 is done and dusted and the focus shifts to FY24. For now, it looks like rates could top out, but whether it will improve growth is still a moot question. Global demand may remain weak in FY24 as would global commodity prices. For India Inc, it would be a case of blow hot and blow cold in FY24.