Information technology major Tata Consultancy Services (TCS) will kick start the third quarter results season for the December quarter on Monday. In general, Q3 is a seasonally weak quarter for the IT sector mainly due to higher furloughs. Management commentary needs to be watched due to the weak economic scenario in the US and Europe. On the other hand, the banking sector may report a healthy set of numbers during the quarter led by loan growth and net interest margins. Cement and metal sectors are expected to report improved margin on QoQ as energy costs is weakening. Building construction companies with strong order books are expected to report mid to high teen growth in Q3FY23. Here is what to expect from major sectors in the December quarter.
Brokerage IDBI Capital Markets said that the December quarter is a seasonally weak quarter mainly due to higher furloughs. In addition, macro challenges are leading to weakness in the mortgage, luxury retail, Hi-tech and a slowdown in 5G capex. In addition, European geo and discretionary spending are expected to slow down. In the current quarter, IDBI Capital Markets expects subdued revenues across IT companies. “We expect large caps to register dollar growth of 0.7- 2.8 per cent QoQ in CC terms aided by 0-10 bps cross currency. Among midcaps we expect revenue growth of -5 per cent to 5 per cent QoQ (organic) in CC aided by 0-20 bps cross currency,” IDBI Capital Markets said in a report.
The auto industry witnessed an overall volume decline (YoY) in Q3FY23 owing to a weak demand post-festive season and inventory correction across dealerships. However, the decline was steeper for 2Ws and PVs. Brokerage Prabhudas Lilladher said, “Aggregate revenue of OEMs may see a decline of 1 per cent QoQ owing to weak volumes and inventory correction. We also see EBITDA margin expansion of around 70 bps QoQ led by gross margin expansion (all OEMs), richer product mix and consistent price hikes.”
It also believes that the premiumisation trend will continue to play out across segments. “In PVs, OEMs with a focus on SUVs (M&M and Tata Motors) will continue to do well. Maruti is expected to do well due to substantial distribution reach and sustained demand in New Brezza and Grand Vitara. It further added that Eicher Motors and TVS will fare better in the 2Ws space, than others led by premium bikes, scooters and new launches.
Banking and Finance
IDBI Capital Markets believes that credit growth remains strong during the December quarter. As per provisional figures, HDFC bank (up 20 per cent YoY), IndusInd Bank (up 19 per cent YoY) and Federal bank (up 19 per cent YoY) reported improvement in credit growth during the quarter. This is driven by home loans and vehicle loans while credit guarantee schemes, working capital loans as well as gold loans continue to support them.
“Sentiments slightly improved on the deposit front. Industry deposit growth stood at 9.9 per cent (Dec 2, 2022) against 9.6 per cent (Nov 18, 2022). In the quarter, we need to watch for management commentary on NIMs as deposit rates are expected to inch up higher going forward,” IDBI Capital Markets said.
Phillip Capital added that NIM will see QoQ improvement on rising lending rate. “Benefit of loan re-pricing to aid margin. Credit cost should moderate due to continued improvement in asset quality,” the brokerage said adding banks may see 19.80 per cent growth in EBITDA in Q3FY23 and a 39.70 per cent YoY rise in profit after tax.
Phillip Capital believes that order inflow is expected to grow 44 per cent YoY driven by transportation infra, water, hydrocarbon, mobility, data-centre and B&F sectors. Revenue, EBITDA and profit after tax growth are to be driven by strong execution of a healthy backlog, softening of key commodity prices and operating leverage. An assessment by the brokerage shows that the capital goods sector may report a 15.80 per cent YoY growth in revenue and a 24.30 per cent rise in profit after tax in the December quarter.
For Q3FY23, industry EBITDA/t is expected to see QoQ improvement due to price increase, consumption of low-cost coal inventory and volume increase. Region-wise, prices have increased in the East (7 per cent), South (around 3 per cent) and West (around 2 per cent), whereas central (down 2 per cent) and north (down 1 per cent) prices have declined.
“Cement demand which was weak on October 22 due to festivals had improved strongly on November 22, we have modelled industry volume increase of 10 per cent YoY in Q3FY23. Energy prices have been volatile and for Q3FY23, average imported coal prices were down by 26 per cent on QoQ basis and benefit for this is expected in Q4FY23,” IDBI Capital Markets said.
Metal and Mining
IDBI Capital Market added that Q3FY23 profitability improved QoQ for steel companies, led by a fall in coking coal prices, rollback of export duty and higher volumes.
“Though in Q3FY23, steel prices continued to fall due to weakening global prices. Nevertheless, coking coal prices have fallen sharply since Q1FY23 – this should likely lift the margins of steel companies in Q3FY23,” the brokerage said.
On the other hand, Phillip Capital believes that profit after tax of the metal and mining sector may plunge by 75.20 per cent YoY and revenue may also dip by 1 per cent for the quarter ended December 31, 2022.
Most of the consumer companies are expected to report decent revenue growth, according to Phillip Capital. However, the majority of revenue growth will be driven via price hikes, which companies have taken in past quarters to combat unprecedented raw material inflation. Rural demand continues to remain muted. Delay in winter to impact winter portfolio.
Phillip Capital added that festive demand in Q3FY23 failed to meet expectations which led to the preponement of EOSS (end-of-season sale) in December. “Demand for mass categories remains under pressure due to inflationary pressure on discretionary income whereas demand in premium products remains buoyant. Softening of raw material prices will gradually reflect in the margins as there is a lag effect between spot and contract prices,” Phillip Capital said in a report.
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