The results saga, as is general practice, began with TCS on the 8the July. The June quarter was always going to be difficult for the IT sector and the signs of tension are already visible. During the June quarter of 2022 (Q1FY23), TCS recorded a 5% growth in net profits on an annual basis. However, the real concern was the spike in the TCS attrition rate at 19.7%. It only means that attrition would be much higher for most other IT companies. The TCS does not provide forward-looking guidance, but the review is quite good. Now let’s move on to the overall picture of the first quarter results at the macro level and later at the sector level.

The big picture and what does it look like before the T1FY23 results?

The macro picture almost looks like it did when the March 2022 quarter results started rolling in. The 4 major challenges remain. First, there is the risk of commodity inflation. It has tapered in the current quarter, but remains elevated. Second, the war in Russia and COVID restrictions in China represent the two biggest supply chain risks for global companies. Third, companies need to prepare for an era of higher returns and higher funding costs and this is already manifesting in the June quarter of 2022. Finally, there is the additional risk that too much belligerence on the part of central banks eventually results in a recession. This will lead to a strong destruction of demand in all sectors.

However, on an optimistic note, many of the above constraints are not as severe as they were at the start of the June 2022 quarter. For example, inflation in food grains, crude oil and industrial metals has fallen sharply over the past two months. Second, if inflationary pressures ease significantly, it is very likely that most central banks will reconsider their overly bullish stance. There is one more point to remember. Over the past 3 quarters, Indian businesses have managed headwinds through cost reductions, reduced inventory hold-ups, better management of creditors and receivables, and more. These perks are largely saturated and room for improvement is limited from now on. Here’s a quick sector view.

1. Oil companies could see a reality check

Oil extraction companies should benefit from the increase in the average price of oil per barrel. However, the recent windfall taxed gains could be a problem for the next few quarters. The same is true for refining companies, as higher GRMs will be offset by higher duties on oil exports. Downstream oil companies could still be under pressure as price increases have not kept pace with the surge in crude prices. Upstream oil companies like ONGC and Oil India are expected to be the best performers in Q1FY23.

2. FMCG could see secondary benefits from lower input costs

The benefits of expanding operating profits in this quarter may be visible after a long period. The major FMCG companies have all raised their market prices, but now input costs for most agricultural inputs and even crude have fallen sharply. Lower inflation with elastic prices should result in better than expected performance of FMCG companies during this quarter. Most FMCG companies will likely see higher operating costs, but this will likely be more than offset by higher spreads on most of their products. Large FMCG players have more to gain than mid-size FMCG players.

3. Automobiles could be the T1FY23’s surprise pack

Don’t get me wrong, the automotive sector has already been a surprise in terms of price performance. At a time when the index was down around 8% in the June quarter of 2022, the BSE Automotive Index is actually up 16%, delivering a tremendous outperformance. There are several things that worked for automakers in Q1FY23. For example, the prices of steel, aluminum and copper have fallen and this has a salutary effect on car manufacturers. The number of automobiles was robust thanks to greater vehicle affordability and improving rural demand. While the second quarter may see more traction, the first quarter of Q1FY23 will also see some growth and profitability benefits spill over from previous quarters.

4. Steel and aluminum could face a double whammy

Note that demand for steel should still remain robust. There may be some delay in construction and infrastructure projects, but general demand for automotive, electrical and consumer goods is expected to remain robust. The problem for steel is price-wise, with steel prices having already corrected more than 20% from recent peaks. In addition, export duties levied on steel are already hitting the demand for steel exports, especially from the EU region. On the positive side, the ore and coking coal duty cuts will be positive, but this should be a pressured quarter for the metals sector.

5. Banks could be worst performers in Q1FY23

What could be positive for Indian banks and financial companies? According to field reports, credit growth has accelerated while rising bond yields are likely to widen banks’ NIMs. Private sector banks are expected to have done better than PSU banks and are expected to record stronger earnings growth in the June quarter of 2022. At the same time, subdued borrowing costs will come to the rescue of banks and help them expand the spreads. However, analysts warned that most banks could face weak cash income as higher operating costs hit profits. However, private banks should have done better than PSU banks in Q1FY23.

6. This will likely be a mixed bag for the IT sector

The IT sector in Q1FY23 is expected to experience robust revenue growth. However, the bottom line is likely to suffer due to increased labor, offshoring and travel costs and increased attrition-related expenses. The first company to report quarterly results for the first quarter of FY23, TCS, also showed an increase in churn rates to 19.7%. Most IT companies are seeing improved deal execution in the first quarter, which should keep revenue growth in good stead, combined with a greater focus on new-age technologies. However, higher labor costs, higher travel expenses and ripple effects from attrition are expected to keep IT margins under pressure in Q1FY23.

A general trend that we might see in the first quarter of FY23 is the weight of performance shifting from pure commodities to user industries. This should be a positive change.