Q3FY23 Result Review – Concept Investwell

Overall a tough quarter to go by

Q3FY23 result season has ended last week. We have seen more negative surprises. Certain sectors namely Financials (Banks and NBFCs), Capital goods, Auto, IT, etc. reported a good set of numbers. Mass retail, Quick Service Restaurants (QSR), Pharma, etc. reported a weak set of nos.

This Q3FY23 result season was also harsh in the sense that most of the stock prices reacted adversely after a bad result but didn’t react (a lot) positively after a good one. Things are a bit unclear as of now as inflation is still on the cards (headline inflation for Jan’23 came out to be 6.52%). Globally, layoffs are going on as talks of recession are spreading like fire. Companies are sounding a bit bearish from the near-term commentary front.

We have seen a good recovery post covid. But now, we seem to enter into a tough time frame. Maybe from now on, it would be easier to separate a man from a group of boys.

Our job is to track the scenario & not lose our patience. Time to get our seat belts on & find new opportunities alongside.

Let us inform you about the Q3FY23 results of our tracking sectors.

Retail

Q3 for retail is in general a very important quarter due to the festive season. Q3FY23 was more of a setback quarter as mostly all the companies (barring a few exceptions) reported a weak set of numbers. Sales momentum faded post the festive season as companies witnessed a deceleration in revenue growth in November and December.

An inflationary headwind resulted in margin contraction in the lower-value segment – Relaxo, Lux, Rupa, etc. posted a weak set of nos. The premium segment continues to outperform relatively – Metro Brands, ABFRL, Shoppers Stop, Titan, Page Inds, etc. remain shielded.

On the channel level, dealers were a bit hesitant to pile up the inventory in Q3FY23 because, on the cost front, the recent past was not good. On top of it, demand was subdued as purchasing power took a hit in the mass segment. But, if we look at the positive side, the majority of the players expect to flush out high-cost inventory by Q4FY23/Q1FY24.

Commentary across companies points out that this seems to be a short-term phenomenon. We can see that in the store expansion front – despite a disappointing Q3, retailers continued their expansion plans (QoQ: >3% store additions) (YoY: >15% store expansion).

Consumer Discretionary

QSR:

Q3 tends to be the strongest quarter for QSR companies with more festivals in place. However, Q3FY23 turned out to be a tough quarter as demand was low in November and December.

Inflation has impacted both the demand and cost of the companies. Some of the main raw materials like milk and cheese have seen prices at a decadal high impacting the margins of the companies in a significant manner.

As indicated by management commentary demand in January improved a bit however it still has been in a similar trajectory to November and December. Q4 can also turn out to be a tough quarter with weak demand and sticky cost inflation persisting.

Consumer Durables:

Consumer durables witnessed demand headwinds during Q3FY23 due to high inflation impacting festive demand, inventory de-stocking in the fans segment ahead of the BEE transition and slow inventory build-up of winter products.

Crompton, Bajaj Electricals and Orient reported muted growth. Bajaj Electricals and Orient electric were able to de-stock non-star rates fans inventory whereas Crompton opted not to fill non-star rates fans in the trade channel in Q3FY23. With this BEE transition in fans, companies expect the cost to increase by 4-6%.

Hospitals

One more decent earning quarter for the Hospital sector. Hospitals are now trending at pre-Covid levels in terms of higher bed occupancy rate (65-70% Industry average) and increase in surgery count along with better cost optimization practices.

The hospitals enjoyed a better payer mix and case mix QoQ with improvement in international operations during Q3FY23

Matured hospitals are reaching almost peak margins while lots of scope remains for emerging new hospitals for margins improvement (operating leverage play). The brownfield expansion as a growth strategy in India remains on track rather than green field growth. Digitalization in traditional healthcare services will play a vital role ahead (Apollo 24×7).

Banking

Double-digit credit growth momentum continues in Q3FY23, led by growth in the Retail and MSME segment. However deposit growth still lags behind credit growth, and with tightening, liquidity banks have increased deposit rates.

On the NIM front, banks have reported expansion due to faster reset in existing loans and new loans approved at higher rates compared to deposits where rates have been increased with a lag impacting new deposits only.

Asset quality of banks saw sequential improvement with adequate provision coverage ratio maintained. Credit costs reported for the quarter were subdued, aiding banks to report higher earnings and better return ratios.

Based on management commentary, credit growth momentum is expected to continue with further NIM expansion in the coming quarter. 

IT

Overall the sector performance in Q3FY23 was good given that Q3 generally tends to be a soft quarter for the sector because of fewer billing days and furloughs.

The demand environment is still healthy and resilient. Management across companies have provided strong commentary around the deal pipeline which is a positive. However, the delay in the decision has led to a delay in the ramp-up of deals and the revenue conversion may take time.

There has been some weakness in pockets of the BFSI vertical (Mortgage, Capital Market, Insurance, and Investment banking), Hi-Tech/Media, Telecom and Retail. On the geography front, there has been a slowdown in Europe as indicated by the commentaries, whereas US and UK continue to do well but, with more caution.

Cost optimization and vendor consolidation have been a focus of clients and it should continue in the coming quarters to come. Full-stack companies should do well in such an environment. Margin levers are persisting with the companies in the form of lower sub-cons, normalization of attrition, increase of utilization, and ease of supply side pressure. This should augur well for Indian IT Companies.

Overall the long-term multi-year digital initiatives continue and the long-term outlook is still positive with some hiccups here and there in the short term.

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