A short-term headwind from the muted Q2 results. ‘Buy on dips’ is the strategy – Blue Barrows

The preview analysis of the just started Q2FY23 results is subdued, both on a YoY & QoQ basis. The signs point to a potential further downgrading in India’s corporate earnings growth outlook for FY23 & FY24.

This is because the Q2 forecast reveals a flat PAT trend on a YoY basis for the Nifty50 index constituents. This is in contrasts with the actual PAT growth in Q1, which was around 20 per cent, supported by a low base and traction in economic activity.

At the beginning of fiscal 2023, the market anticipated an EPS growth of 18% to 20% for Indian corporates in FY23.

However, this picture has been constantly deteriorating as a result of the continued decline of the global economy, increasing inflation, and hawkish monetary policy.

Year-to-date, Nifty50 EPS growth has been downgraded by about 5%. And as the trend persists, the actual growth of India can reduce to 12% by March 2023 compared to earlier high estimates.

A fair news is that the market has factored in some of the downgrades, but the reality is that it is not comprehensive, as the stock continues to trade at a high valuation.

In this challenging period, domestically oriented sectors are performing well. For example, during Q2, Auto, Telecom, FMCG, Infra and Power are likely to post good earnings growth supported by festival demand & industrialization.

Improving traction is also noticed for the domestic financial sector on a QoQ basis. The Indian economy is demonstrating strong resilience compared to the rapidly slowing global economy.

However, the slowdown in the global economy is having an effect on the industries, which have high co-relation, either in terms of demand or supply.

Weak trends are seen in Metals, Cement, Oil & Gas, and Pharma due to the high cost of raw materials, supply constraints, and a slowdown in post-COVID demand like healthcare.

Moderation in growth is seen in IT, Retail, and Chemicals due to the recession, inflation, and high cost of sales, leading to a fall in revenue growth & margins.

In a nutshell, corporates are showing a mixed tendency with a negative bias in that domestic-oriented industries are performing well.

The sense is that Q3 can be better than Q2 on a QoQ basis due to festival, post-monsoon demand, and moderation in international raw material cost.

However, persistently high inflation and a drop in demand following the festive season will have an impact on sectors like Auto, FMCG, and Durables in Q4.

It is forecasted that inflation will continue to be high till the end of next year, Dec. 2023. Hence, the overall effect on India’s corporate earnings in FY23 & FY24 will be mixed with downside risk.

The Indian market has been subdued in the last one month, down by 5%. The muted Q2 is partially factored in. However, the risk is that the market is still holding a flourishing outlook on 2023, which could give a setback in the future.

The optimism comes with the view that raw material costs will reduce due to a fall in international prices of commodities like metals & crude, which is positive for India.

Fall in cost is in anticipation of economic slowdown, closure of war, and increase in supplies in the post-pandemic world.

However, India can expect volatility for the next 3 to 4 months because the world situation is still in a doldrum not providing the required vision.

Despite this, the negative effect on India will be limited because of a stable domestic economy and its progression as a global manufacturer & service provider.

Buying at a dip is the best strategy in this scenario with a focus on domestic economy-oriented stocks & sectors.

The sectors which are expected to outperform are IT, Pharma, FMCG, Durables, Green Initiatives, Specialty Chemicals, and Mass Manufacturers with value buying as the theme.

(The author is Head of Research at Geojit Financial services)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)