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1QFY22 results review: Strong start to FY22

In line; Nifty FY22/FY23 EPS STABLE

* Corporate earnings in the first quarter of FY22 have been in line with the elevated expectations, aided by the deflated base of 1QFY21 and localized and less stringent lockdowns v/s 1QFY21. Sectoral earnings have diverged sharply on account of the impact of second Covid-19 wave and higher commodity prices impacting the margins of select sectors (Auto, Consumer Staples, and Durables). On the flip side, cyclical sectors such as Metals and Oil and Gas (O&G) have benefitted, driving in-line aggregate earnings.

* For the MOFSL Coverage Universe, the earnings downgrade to upgrade ratio for FY22 stands at 6:5 – as 59 companies have seen downgrades > 5%, while 47 companies have been upgraded by > 5%. Management commentaries across the board indicate an improvement in the demand environment post Jun’21, led by the easing of restrictions and sharp reduction in active Covid-19 cases. The pace of vaccination has picked up – average daily doses in August stand at 5.2m doses/day, v/s 4.3m doses/day in July. Amid the likelihood of a normal monsoon season, we expect corporate earnings to recover as economic activity picks up and pace of vaccination accelerates further.

* 1QFY22 has been an in-line earnings season for the MOFSL Universe. ~42% of companies in the MOFSL Coverage Universe have beaten our estimates, while 39% have missed our estimates.  Nifty sales have been in-line (50% YoY; est. 48%), while EBITDA/PBT/PAT growth has come in at 41%/103%/101% YoY (est. 38%/89%/94%). Of the Nifty constituents, 42% have reported beats on our PAT estimates, while 34% have missed expectations.

* The MOFSL Universe has reported sales/EBITDA/PBT/PAT growth of 51%/50%/120%/117% YoY (est. 46%/46%/111%/114%). Ex-Metals, EBITDA/PBT/PAT growth for the MOFSL Universe has come in at 30%/70%/62% YoY (v/s est. 26%/60%/58% YoY). On a two-year CAGR basis, the MOFSL Universe has reported EBITDA/PBT/PAT growth of 12%/14%/16%. Around 10 sectors have posted doubledigit or a higher two-year profit CAGR. The prominent ones among these are Metals (127%), PSU Banks (60%), Specialty Chemicals (22%), Private Banks (15%), Cement (13%), Technology (13%), and O&G (10%).

* The Nifty FY22E/FY23E EPS estimate has remained steady at INR732/INR865 (earlier: INR733/INR868). The downgrades in Auto & NBFC sectors have been compensated by upgrades in Metals and Cement sectors.

* Key highlights:

1) Technology: 1QFY22 marks the fourth quarter of robust QoQ revenue growth; 8 of 13 companies have beaten our earnings expectations. 2) Metals: Highest ever quarterly earnings of INR337b have contributed to 45% of incremental PAT, aided by strong price realization in the domestic and export markets. 3) O&G: Led by OMCs, the segment has posted a better-than-expected performance from the Marketing segment. 11 of 15 companies have reported beats on PAT. 4) Consumer: 16 of 18 companies have posted double-digit sales growth, aided by the deflated base of 1QFY21 and buoyancy in rural and urban demand.

* RM prices, however, have continued to impact the gross margins of companies. 5) BFSI: Most private banks have reported fresh slippage from the Retail segment, although the impact on asset quality has been less severe than that seen during the first wave. NBFCs have reported results below expectations as lockdowns have impacted collections and disbursements, leading to stress buildup across segments.

* Cement, Specialty Chemicals, Consumer Durables (largely Havells), and O&G have reported beats on our 1QFY22 estimates, while Auto, Cap Goods, NBFC, and Telecom have come in below our estimates.

* Sectoral highlights – The MOFSL Technology Universe has posted healthy in-line earnings, with USD revenue growth of 4.5% QoQ. The IT companies in our Coverage Universe have together added 71k employees, indicating the expectation of continued momentum in deal wins and a strong demand environment.

* The Metals Universe has reported results in line with our expectations (PAT at INR337b v/s est. INR339b), led by strong price realization for steel companies in both the domestic and export markets, although partly offset by lower volumes. However, deleveraging has taken a backseat as working capital has increased due to higher inventory pile-up and commodity prices.

* The MOFSL Private Banks Universe has reported PAT growth of 29% YoY despite sluggish disbursements in overall loan growth. Asset quality has deteriorated sequentially as banks have reported higher slippage, primarily led by Retail. However, the overall impact has been curtailed and is much lower v/s the first wave. The performance of the NBFC Universe has been below our expectations, with PAT decline of 28% YoY (v/s est. 13% YoY growth).

* The Consumer Universe has posted sales growth of 30.6% v/s our est. of 18.8% YoY. 9 of 18 companies have beaten our sales growth estimates. EBITDA performance has been muted, despite the strong sales growth and some form of price hikes by companies, driven by sharp raw material inflation. PAT growth has been in-line at 27% YoY v/s est. of 24% YoY. Consumer Durables has reported 161% YoY growth (est. 135%), largely led by Havells reporting profit growth of 270% (v/s est 88% YoY). Voltas, Whirlpool, Orient Electric, and Blue Star have posted results below our expectations.

* The Healthcare Universe has reported PBT/PAT growth of 15%/18% YoY, in line with estimates.

* The MOFSL Cement Universe has reported results well above our expectations (115% YoY growth in profit v/s our estimate of 94%), aided by a) 43% YoY volume growth, as lockdowns have been less severe v/s 1QFY21, b) higher realization on firm prices, and c) strong margins, led by cost control, offsetting higher fuel and freight costs.

* The MOFSL Automobiles Universe has posted loss of INR1b v/s the expectation of INR23b profit. Ex-Tata Motors, PAT would be INR43b as Tata Motors has been impacted by both business closures in India and chip shortages for JLR. RM cost inflation and operating deleverage have impacted most of the results in 1QFY22. PAT for our O&G Universe has grown 84% YoY (est. 36%), led by a better-than-expected performance from the Marketing segment for OMCs.

* Sector-level earnings revision for the MOFSL Universe: Metals, Retail, and Cement have seen FY22E earnings upgrades of 7%, 5%, and 2%, respectively. Auto, NBFC, and Healthcare have seen FY22E earnings downgrades of 16%, 10%, and 3% respectively.

* The top upgrades (FY22E) stand as follows: IOC (22%), Tata Steel (19%), BPCL (17%), JSW Steel (13%), Cipla (6%), UltraTech Cement (6%), and Wipro (6%).

* Top earnings downgrade (FY22E): Tata Motors (-77%), Maruti (-13%), Bajaj Finance (- 11%), M&M (-9%), and Britannia (-6%).

* View: Corporate earnings in 1QFY22 have been led by cyclicals (Metals, Cement, and O&G), aided by a low base and less stringent lockdowns v/s 1QFY21. Management commentaries across the board suggest an improved demand environment post June’21, led by the easing of restrictions, lower active COVID-19 cases, and a pickup in vaccinations. Amidst the buoyant sentiments, elevated activity in primary markets, Nifty valuations at 21x 12m forward EPS remain rich and thus consistent delivery on earnings expectations going ahead become crucial. We remain OW on BFSI, IT, Metals, Cement, and Capital Goods; Neutral on Consumer, Auto, and Healthcare; and UW on Telecom, Energy, and Utilities.

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