Q4FY22 earnings are likely to moderate AT 12% YoY; this will be a SEVEN-QUARTER LOW.
The reason for moderation would be commodities, reconciling its divergence with overall aggregate. While Banks, exporters (chemicals, IT) and consumer services are likely to report strong earnings, however, consumer companies are likely to remain muted, largely due to soft demand.
There are more adverse macro and fading tailwinds of global reflation, market share gains and lower credit costs pose downside risk to estimates of FY23.
Demand – rather than margins – looks more vulnerable.
Earnings growth moderates
1. Led by commodities…
Earnings growth is likely to moderate in Q4FY22 to 12% YoY for our coverage universe. The moderation is likely to be mainly led by commodities (key earnings driver so far), while the uptick in rest is not material enough to offset commodity slowdown.
In non-commodities, unlocking has propelled consumer services’ profits. Exporters (chemicals, IT) too are likely to report continued strength. Meanwhile, lower credit costs YoY are likely to continue to aid banks’ profits. Price hikes taken may support some domestic consumer companies’ earnings, but they are likely to stay weak at large. Industrial companies are likely to report an uptick in execution.
2. …but its demand dynamics are worrying
Margin pressures are stabilising sequentially (although still down YoY); however demand dynamics are far more worrying. Despite price hikes, top line (ex-commodities) is likely to remain stable at 11–12% YoY (similar to WPI manufacturing).
Real growth is likely to moderate across the board as price hikes amid weak sentiments and fading pent-up weigh on demand. Even in BFSI, while loan growth is likely to accelerate, top line may not as NIMs moderate, asset growth remains stable and lower treasury gains weigh on other income. Exporters (chemicals, IT) remain one of the stronger demand centres.
For FY23, the environment is even more challenging
1) commodity supply shock;
2) fading global reflation, which could weigh on exporters’ earnings;
3) tailwinds from market share gains and lower banking sector credit costs having passed
4) potential moderation in urban wages. However, the rural economy is likely to fare better given higher food prices.
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