Another stellar performance; managements highlight demand recovery
* In this report, we present detailed takeaways from the 3QFY21 conference calls as we refine the essence of India Inc. – ‘Voices’.
* The 3QFY21 corporate earnings season revved up from 2QFY21, with big beats and upgrades reported across the MOFSL Coverage Universe. Sharp demand recovery was seen during the festive season – with the opening up of the economy and the number of COVID-19 cases being contained, coupled with continued cost-saving initiatives. With an upgrade (>5%) to downgrade ratio (<- 5%) of 7:2, 3QFY21 has been a blockbuster earnings season. 57% of the companies in our MOFSL Coverage Universe beat 3QFY21 estimates, while 24% reported below-est. results. This has resulted in the second consecutive quarter of material upgrades for Nifty EPS.
* Commentaries of banks suggest business trends have reached pre-COVID levels, particularly on the retail front, while the corporate book is also showing gradual recovery, led by a focus on capex revival. We saw an uptick in NII growth as the business momentum improved across segments – exceeding pre-COVID levels. More importantly, on the asset quality front, the COVID-19 impact appears to be limited as asset quality fared much better than earlier expected – led by an improvement in CE (97% for large banks), controlled slippages (proforma), and low restructuring (v/s earlier indicated). Commentaries of NBFCs suggest collection efficiency (CE) has reverted to normal run-rate (100%+ in Vehicle Finance and ~98% in Housing Finance) in Dec’20. The managements of some of the larger NBFCs believe margins are likely to witness sharp improvement in FY22 on lower cost of funds, reduced liquidity, and a favorable base (due to interest reversals).
* For the Consumer sector, this quarter marked revival in demand from the urban areas as mobility in the big cities began to normalize post the easing of lockdown restrictions, while rural demand remains robust. Consumer sentiment remains positive, and companies have expressed strong confidence in growth prospects going forward. While most commodity prices witnessed inflationary trends toward the end of 3Q, companies are evaluating price hikes to mitigate the impact.
* In Autos, recovery witnessed in 2Q sustained and gathered momentum in 3Q, supported by the festive season. Supply-side issues continue to be a big constraint on companies for inventory building in segments such as Tractors and PVs – as most OEMs indicated a cautious stance on the issue of semi-conductor availability. RM cost pressures are expected to impact OEMs and component players in 4QFY21.
* In IT, demand recovery was seen across the company portfolio, indicating an increase in corporate IT spending. Companies have seen the deal pipeline improve further (v/s 2QFY21), with the main focus on Data, Cloud, and Security. Managements indicated the pandemic has accelerated the digital transformation across enterprises, with the main focus on cloud buildup. Furthermore, the managements hinted at the risk of rising attrition from current levels as the situation normalizes.
* Most companies in the post-earnings management calls reported ~80% utilization for 3QFY21, driven by strong rural/semi-urban demand and an uptick in government projects. Companies further noted that demand in January was impacted by severe winters, although it has started to pick up in February. Managements informed that cement prices have softened across regions in Jan’21, on account of severe winters, and stabilized in Feb’21 (down 2–3% QoQ).
* In Healthcare, companies have indicated the slowdown in terms of ANDA filings over the past 3–4M is expected to reverse with the easing of the lockdown and an uptick in R&D activity. However, companies await clarity on inspections in the form of physical and/or desktop audits for sites under regulatory constraints. In the API space, the managements clarified that slower sales are attributable to higher inventory buildup in formulators in the previous quarters, while medium- to long-term growth remains intact.
Recovery witnessed in 2Q sustained and gathered momentum in 3Q, supported by the festive season. Supply-side issues have curtailed inventory building for segments such as Tractors and PVs, and most of the OEMs indicated a cautious stance on the issue of semi-conductor availability – as this could impact production in 1HCY21. RM cost pressures are expected to reflect in the range of 3–4pp across OEMs and component players in 4QFY21. Also, some of the managements indicated that some of the other cost savings would gradually normalize as demand-supply normalizes.
Management commentaries indicated that most of the companies are now at almost 100% labor strength v/s pre-COVID levels, albeit at slightly lower efficiency due to COVID-led security measures. The L&T management indicated the normalization of the supply chain in India, with some challenges related to imports and exports persisting. Cummins’ management was cautious on the export market, as a second lockdown across Europe poses a risk to ongoing recovery. In Consumer Electrical, Havells and Crompton’s managements indicated continued market share gains across most categories – at the expense of unorganized players and smaller organized companies. This, coupled with price hikes, led to strong topline growth for these companies. For ACs, managements across companies indicated further price hikes may be needed if commodity prices stay inflated.
Most companies in the post-earnings management calls reported ~80% utilization for 3QFY21, driven by strong rural/semi-urban demand and an uptick in government projects. The Real Estate sector, on the other hand, continues to suffer from muted demand. While demand in January was impacted by severe winters, it has started picking up in February. The government’s renewed push for road, rail, and infra projects, coupled with strong IHB demand, would further drive demand in 4QFY21 and sustain the growth momentum witnessed over the last two quarters. Managements informed that cement prices had softened across regions in Jan’21 on account of severe winters and have stabilized in Feb’21 (down 2–3% QoQ). Due to sharp hikes in petcoke prices, companies have increased the use of imported coal. JKCE guided for a ~INR80/t QoQ inflation in power and fuel cost in 4QFY21. Moreover, the fixed cost reduction achieved in 1HFY21 has started normalizing with advertising expenditure going up, but the impact was marginal on account of better fixed cost absorption. With a robust demand outlook and the ramp-up of newly commissioned capacities, a portion of the fixed cost – such as admin expenses, repairs, and ad spends – is likely to increase in 4QFY21.
The quarter saw revival in demand from the urban areas as mobility in the big cities began to normalize post the easing of lockdown restrictions, while rural demand remains robust. At the same time, pent-up demand and an upbeat festive sentiment also played an important role in driving demand. These factors aided revival in the Out-of-Home and Discretionary categories. Consumer sentiment remains positive, and companies have expressed strong confidence in growth prospects going forward. While most commodity prices witnessed inflationary trends toward the end of the third quarter, companies are evaluating price hikes to mitigate the impact. Demand revival has led to companies resuming their investments in brands through ad spends at preCOVID levels, and in some cases, even higher than these levels. This would lead to the normalization of elevated margins seen in the recent quarter, achieved through cost savings. General trade continues to do well, while modern trade is now normalizing from the after-effects of the COVID-led lockdown. The ecommerce channel progressed on its growth trajectory during the quarter, leading to higher salience in the channel mix across companies.
* Commentaries of banks suggest business trends have reached pre-COVID levels, particularly on the retail front, while the corporate book is also showing gradual recovery, led by a focus on capex revival. Thus, we expect loan growth to improve further from 4QFY21. Moreover, the gradual deployment of excess liquidity and lower cost of funds would continue to support margins. Furthermore, fee income trends have improved sequentially and are expected to pick up gradually as business growth revives further. On the asset quality front, the COVID-19 impact appears to be limited as asset quality has fared much better than earlier expected, led by an improvement in CE (97% for large banks), controlled slippages (proforma), and low restructuring (v/s earlier indicated). Banks have strengthened their PCR and carry additional provisions on proforma slippages, which should keep credit costs in check; thus, banks have guided for normalization from FY22. Although slippages would increase over 4QFY21, expect normalizing trends from FY22. This addresses the key concerns around the business outlook and asset quality of the banks.
Commentaries of NBFCs suggest collection efficiency (CE) has reverted to normal run-rate (100%+ in Vehicle Finance and ~98% in Housing Finance) in Dec’20. The only segment wherein CE recovery is pending is the MFI segment, especially in certain states such as West Bengal and Assam. Companies are positive about the minimal write-offs and believe restructuring would be limited to 1–2% of the book. The managements of some larger NBFCs believe margins are likely to witness sharp improvement in FY22 on lower cost of funds, reduced liquidity, and a favorable base (due to interest reversals). Vehicle financiers are positive of achieving double-digit AUM growth and expect asset quality to normalize completely over the next two quarters.
The slowdown in terms of ANDA filings over the past 3–4M is expected to reverse with the easing of the lockdown and an uptick in R&D activity. The USFDA’s pace of approval remains robust given its smooth functioning. Companies await clarity on inspections in the form of physical and/or desktop audits for sites under regulatory constraints. Domestic formulation growth is on the revival path, led by increased off-take in medicines from Acute therapies and the growing pace of new launches in the recent past. Operational cost is expected to rise with an increase in the on-ground activities of medical representatives (MRs). Digitization would drive some cost savings on a structural basis going forward. Managements clarified that lower API sales have been largely attributable to higher inventory buildup by formulators in previous quarters. However, medium- to long-term growth remains intact in the API segment.
Revival in the economy and festive season in 3QFY21 led to an increase in advertisement spends by corporates – resulting in recovery in ad revenues for broadcasters. Broadcasters have guided that while a volume uptick has been observed, ad rates are still below pre-COVID levels. Managements remain uncertain over the timeline of NTO 2.0 as regulations are yet to be finalized. The managements expect that this may lead to slower growth in subscription revenues. SUNTV plans to release a Marathi channel in FY22 and increase its investment in the Marathi and Bengali genres, which have a larger market opportunity. ZEEL has guided to significantly increase its investments in the Movie Production business (35–40 movies/year) – which could dilute its margin profile – along with increasing investments in the Digital business. As cinemas have opened up with the relaxation of seating norms and strong success of the ‘Master’ movie, PVR expects other producers to start releasing their movies; occupancy would increase sequentially, along with recovery in ticket prices from 4QFY21.
Companies have highlighted that domestic steel demand remains strong. The higher thrust on infrastructure in the Union Budget 2021–22 bodes well for steel demand. Tata Steel’s management guided that steel realization should be higher by INR6,000–7,000/t in 4QFY21. The impact of higher coking coal prices would be reflected in 1QFY22. Cash flows in 4QFY21 should remain strong and would be utilized for further deleveraging. Hindalco expects aluminum prices to remain strong, supported by demand recovery in FY22. Hindustan Zinc has guided for higher production in FY22, with the FY21 exit guided at a rated capacity of 1.2mtpa.
Oil & Gas
OMCs and CGDs highlighted the impact of the lockdown continues, with restrictions on public transport, offices, schools, etc., still in place. Although, demand should spike in the coming months on the back of increased demand seen in the summer seasons in India. OMCs reiterated that GRM trends and marketing margins over the long term would stand at normalized levels. RIL continues to further streamline its O2C Integration business and focus on expanding its Fuel Marketing business. IGL and MAHGL mentioned that CNG volumes in Jan’21 were down 6–9% YoY and are expected to reach pre-COVID levels by end-4QFY21. PLNG has guided for an increase in LNG imports as spot prices cool off from their abrupt peak over Dec’20–Jan’21. GAIL expects total trading volumes of ~11mmscmd to be sold in India within another year (i.e., entire volumes that were sold abroad up to 2QFY21) – with the commissioning and ramp-up of various other fertilizer plants.
The Retail sector saw gradual recovery in sales as economic activity continued to pick up, with over 95% of retail stores operational in 3QFY21. Furthermore, the festive season, wedding season, and winter arrivals provided the sales push. Footfall is gradually improving MoM (decline in Dec’20 due to festive season demand in Nov’20), but still stands below last year’s levels. Retailers expect sales to reach pre-COVID levels in FY22E. Furthermore, retailers would continue to invest in their online capabilities and look to increase revenue contribution to the double digits. Lastly, players are looking to commence store expansions, with ABFRL guided to open an additional 100 stores in FY21. V-Mart maintains its long-term target of 25–30% new store openings annually. SHOP’s management has guided to open 10–12 departmental stores from FY22 and close 5–7 non-profitable stores.
Demand recovery was seen across the company portfolio, indicating an increase in corporate IT spending. In terms of verticals, BFSI, Retail, Healthcare, Technology, and Telecom have seen good recovery. Energy and Utilities, Manufacturing (Aero and Defense), and Travel and Hospitality are expected to take longer to recover. Companies have seen the deal pipeline improve further (v/s 2QFY21), with the main focus on Data, Cloud, and Security. The pandemic has accelerated the digital transformation across enterprises, with the main focus on cloud buildup. This opportunity is not limited to just ‘cloud migration’, but would also be extended to the ‘use of cloud applications’ – making the IT industry a key beneficiary in the long run. Furthermore, the managements also hinted at the risk of attrition rising from current levels as the situation normalizes.
Telcos have maintained their stance that industry ARPU is very low and should reach INR200 in the near term and INR300 in the longer term (for generating healthy returns on capital). They are not expected to see a significant increase in capex with the introduction of 5G as this would be partly offset by the reduction of 4G capex. Furthermore, telcos would wait for the availability of an appropriate spectrum and ecosystem to prepare to roll out 5G services. Indus’ management has reiterated that it is continuing to engage with telecom operators to bring customers back to the fixed energy model, which is more sustainable. Furthermore, it seeks to revalidate its growth strategy. TCOM is witnessing early signs of recovery; however, deal conversion remains slow. The order book is growing with participation in large deals.
PWGR noted that it had been able to improve its billing realization, which was 95.7% for 9MFY21, and receivables declined to 63 days at end-3QFY21 (v/s 69 days: 2QFY21 and 86 days: 1QFY21). PWGR plans to reduce its receivable days to 50–55. It noted that monetization proceeds from InvIT would be used for future growth purposes or/and higher dividends (excess amount) depending on the capex target. NTPC noted that over dues decreased to INR157b in Jan’21 v/s INR192b in Sep’20. It is hopeful of receiving INR80b from tranche 2 of the Atmanirbhar scheme. NTPC expects 5.1GW of capacities to commercialize in FY21 and another 6GW (1.8GW solar) in FY22. It expects overall FC u/r to be INR3.5–4b at end-FY21 and is in touch with CERC to recover INR0.8b due to high demand–low demand season regulations. COAL noted that it has booked 92mt of e-auction volumes this year v/s 60mt last year. It noted that e-auction premiums stood at 25% in the last month, and it expects improvement in eauction realizations as booking is done at higher rates. In terms of receivables, it reported INR216b in Jan and would put pressure on customers from April to recover its dues.
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