India Inc.’s rockstars of Q2 and things that investors should look out for, according to analysts

• Banking, financial services and insurance (BFSI), automakers, chemicals, aviation, retailing and chemical sector companies emerged as the rockstars of India Inc.’s Q2 earnings.
  
• Overall, India Inc. reported a 24% year-on-year top line growth in Q2 FY23, with the aggregate revenue of 1,917 companies coming in at ₹25.6 lakh crore.
  
• While the BFSI sector reported earnings upgrades due to near-decade high credit growth, auto companies drove the festive boost.
  
• From private and public sector banks to auto companies, chemical manufacturers and more, these are the top performers of India Inc. this quarter.
  

Markets always track the outperformers as that’s what generates alpha. India Inc has returned to double digit profit growth after several years, as companies have spent time cleaning up their balance sheets and deleveraging. Corporate India’s overall revenues rose 24% year-on-year, driven by key sectors like BFSI and auto. Despite this, performance of some sectors has been better than others.

Business Insider India decided to delve deeper into the earnings of the September quarter to look for the stars and also assess if they would continue to outperform the broader universe.

Overall, India Inc. reported a 24% year-on-year top line growth in Q2 FY23, with the aggregate revenue of 1,917 companies coming in at ₹25.6 lakh crore. However, profitability took a downturn due to inflation, resulting in a 5.4% decline in net profit to ₹2.19 lakh crore, according to a report by Bank of Baroda.

The banking, financial services and insurance (BFSI) sector has been one of the standout performers, with a 19% year-on-year growth Q2 in net interest income, driven by high credit demand. A reduction in non-performing assets and thereby provisions also aided growth in net income.

BFSI companies see earnings upgrades, asset quality improvements

In the BFSI sector, PSU banks won the maximum earnings upgrades, according to a report by SBI Securities.

Non-banking financial companies (NBFC) reported net profit growth of 23.5% year-on-year, whilst also reporting an improvement in asset quality.

Overall, SBI Securities’ picks in the BFSI sector include large and mid-size private sector banks like Axis Bank, ICICI Bank, HDFC Bank, Kotak Mahindra, Bank of Baroda, Canara Bank, and Bank of Maharashtra. In the NBFC segment, the report lists Bajaj Finance and CanFin Homes, whilst ICICI Lombard and HDFC Life are the picks in the insurance segment.

Automakers drive the festive boost – softening commodity prices to improve margins further

In the auto sector, the festive boost drove customer demand across segments, with auto companies confident of a further improvement in margins during the second half of FY23.

In its report, SBI Securities states that among the nine auto makers sampled, revenue rose 34% year-on-year in Q2, while net profit surged 40% during this period.

Auto ancillaries, on the other hand, had a mixed quarter, with 56 companies in total reporting a 26% YoY rise in sales in Q2, while profit increased 23% during this period.

Here’s what the second half of FY23 looks like for rockstars

Going forward, SBI Securities says that it expects credit growth to remain healthy, which is built into the target prices of its top picks from the BFSI sector.

In the auto sector, companies expect to further improve their operating margins in the second half of FY23 due to commodity prices cooling down. The SBI Securities report notes that passenger vehicle demand remains strong, and a good monsoon has helped maintain the momentum in tractor sales, too.

The FMCG sector, which reported earnings in line with estimates, saw outperformance by Britannia, United Spirits and ITC. However, the research firm says that margin recovery has likely been delayed to Q4, instead of the earlier expectation of a recovery by Q3.

The capital goods sector was another star performer in Q2, reporting a strong order book. However, unresolved supply chain issues and high logistics costs could derail the momentum, the research firm said.

Here are the top stock picks of SBI Securities based on Q2 performance:


Note: Current market price as on November 29, 2022

India Inc.’s Q2 – the key takeaways

Overall, the average growth in revenue of 1,917 companies in Q2 stood at 24%, as against 27.4% in the same period last year, according to a report by Bank of Baroda.

Of the 38 sectors analysed, 15 reported an above average growth in revenue, which is in the range of 25-110%. These outperformers include auto, trading, hospitality, gas, power, among others.

IT spending, ARPU, input costs and monsoon amongst the key things to watch out for

Amongst the key things to watch out for in India Inc.’s earnings include outlook on IT spending, the average revenue per user (ARPU) trends in the telecom sector, input costs in sectors like chemicals, metals, auto, and cement.

For the agro chemicals sector, monsoons will play a key role, according to analysts at SBI Securities. “The outlook though for the upcoming rabi season looks favorable given the high moisture contents,” the SBI Securities report stated.

In addition to this, consumption trends, global demand and supply scenario, and interest rates will also be key factors to watch out for.

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