Except financials, Nifty50 companies show bleak chances of earnings upgrade: Analysts

The banking and financial sector was the star performers in terms of earnings reported so far for the quarter ended September 2022.

Other sectors, especially consumer staples and consumer durables, which reflect closely upon the state of economy, are still showing weakness which indicates that the rural Indian economy has still not recovered from the impact of the pandemic.

Economic recovery looking weak

The latest results of companies from the consumption space provide further evidence of a tepid economic recovery. “Three-year volume CAGR of autos and consumer staples and revenues of consumer durables companies suggest demand conditions are still to recover fully from the Covid-inflicted negatives on household income and balance sheets,” said analysts at Kotak Institutional Equities Research.

They see a low probability of earning upgrades until growth finds a higher gear, which may be difficult in the current macro environment.

Quarterly earnings on a weaker side

According to a note by Kotak Institutional Equities, the Q2FY23 earnings season has been disappointing until now, with aggregate net profits of the Nifty50 Index coming in 4.6 percent below estimates and are 7.7 percent lower after excluding financials.

“We note that broad weakness across sectors, excluding financials, limits the chances of earnings upgrades while, the market multiples are rich both on a historical basis and versus bond yields,” the note from Kotak said.

This is also reflected in the growth stocks which have re-rated significantly from March 2019 levels despite weak demand conditions and similar levels for bond yields.

Consumption growing at a slow pace

The analysts at Kotak saw the volumes of consumer staples stocks under their universe average a minus-1.6 to 15 percent growth rate over three years, while the volumes of consumer discretionary companies grew at of 5 to 18 percent annually in Q2FY23. At the same time, the revenue of consumer durables companies witnessed a three-year CAGR of 3 to 17 percent.

The weakness in staples is likely a result of a disproportionate impact of Covid-19 pandemic on low-income households as they appear to have reduced usage; moved down to cheaper products and may have migrated to unbranded products from the unorganized sector.

Auto sector performance not giving confidence

The automobile sector which was underperforming for the past few years due to a number of factors is still not showing a strong overall recovery. In the first six months of FY23, the two-wheeler (2W) volumes have grown at minus-4.7 percent while the volumes of passenger vehicles (PV) have grown higher by 9.1 percent on a three year CAGR basis.

PV volumes have recovered to H1FY19 levels (pre-Covid), while two-wheeler volumes are still 28 percent below the same level.

“The pace of the recovery in the auto sector continues to be weak, considering the slowdown in base over the past four years and the large number of products launched in 9MCY22,” said the analysts at Kotak Institutional Equities.

GST Collections may slow down

The data shows that in the first seven months of FY23 ending October 2022, the GST collections increased by 14.1 percent on a three year CAGR basis. This may not be reflecting the true situation of the economy.

Experts say that the GST collection might have bumped at the back of increase in WPI inflation which increased at 3-year CAGR of 8.2 percent. With the WPI inflation expected to trend lower in the coming months, the tailwinds to GST collections may slow down significantly.

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