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It’s time for December quarter earnings (Q3 FY2023) to unfold. Expectations are that the worst in terms of margin pressure is behind them for most of India Inc as softening input costs ease pressure on profitability. But some sectors may spring negative surprises of growth moderation.
First to announce, the information technology (IT) pack, may simmer optimism on the Street. News of tough cost measures and a deteriorating global economy have led to valuations coming off in the past two quarters. Add to this is the fact that the pandemic-driven need to spend online and adopt digital technology may wane, leading to slower order accretion for IT services companies.
Similarly, metals and commodity firms that were spewing cash for several past quarters are likely to see moderation in operating profits. Cascading metal prices, welcomed by manufacturing companies, imply lower realisation and revenue growth. But there may be some good news, too -- reduction in input costs such as petcoke, although the full benefit may not be felt in Q3. Investors in cement firms may rejoice as demand remains stable and margin decline may not be as pronounced as in the last 3-4 quarters.
Q3 results from sectors such as automobiles and fast moving consumer goods (FMCG) may appease investors with expansion in operating profits and earnings compared to the weak quarter a year ago. Indeed, raw material costs are ebbing. However, brokerages concede that revenue growth may moderate on the back of weak post-festive demand. Will this overshadow the benefit to earnings from lower costs?
In other words, the quarter will see input cost pressures that squeezed profits of India Inc in the past 3-4 quarters, ebb. However, the strong pent-up demand on account of the recovery from the pandemic may also moderate. This along with lower inflation will temper revenue expansion in the quarters ahead.
Further, domestic demand prospects are foggy, given the weakness in rural demand. For instance, small car and entry-level two-wheeler sales underscore this.
Results from export-driven companies will be weak. Sticky inflation may keep the US Fed focused on rate hikes for some more time, fuelling fears of a global slowdown that would hurt exports from India.
The silver lining in Q3 earnings would be robust performance by banks where credit growth and better margins would boost earnings growth. Likewise, India’s Purchasing Managers Index has thrown pessimism out of the window in core manufacturing sectors. This holds promise for capital goods and infrastructure firms that would also meet investor expectations in the quarter.
That said, it is time to reset expectations on earnings momentum ahead. Investors would do well to focus on management commentary, particularly to get a fix on growth that is moderating locally and is weak globally. Rural distress and unemployment are worrisome. Key words in the management commentary would be demand growth, sales volumes, fresh order intake and price revisions, even as fears of cost pressures wane. These would give insights on how revenue and earnings would pan out in the coming quarters.
Investing insights from our research team
Marico quarterly update: Revenue growth modest, margin recovery takes hold
Is there an opportunity to invest in the chemical sector?
Is the drought in deposit growth finally reversing?
Indian Energy Exchange: Volumes back on radar, light up earnings upgrade hopes
What else are we reading?
Start-up Street: Why family businesses score better than new age start-ups
Two-wheeler sales stuttering, how long before it gets better?
Chart of the Day: The changing contours of bank credit
Indian oil imports to remain on a slippery track this year
US inflation has not ‘turned the corner yet’, IMF's Gita Gopinath warns (republished from the FT)
Will crypto ever be a safe investment?
Budget 2023: Agricultural R&D has made a huge difference and its outlay should be raised
The Fed has a Greenspan conundrum on its hands
ChatGPT is no magic bullet for Microsoft’s Bing
Technical Picks: Gujarat Gas, HDFC Bank, Deepak Nitrite, Federal Bank, USD-INR and Lead futures (These are published every trading day before markets open and can be read on the app). Vatsala Kamat Moneycontrol Pro
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