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2QFY22 interim earnings review

Results marginally ahead of expectations; RM impacts gross margins; Nifty EPS estimates remain unchanged

* 127 MOFSL Universe and 34 Nifty companies have announced their results, as of 31 Oct’21. The companies that have reported earnings so far comprise: (a) 70% of est. PAT for the MOFSL Universe, (b) 71% of est. PAT for the Nifty, (c) 60% of India's market capitalisation, and (d) 78% of the Nifty 50 index weight.

* The 2QFY22 earnings are marginally ahead of our expectations as the companies benefitted from a) strong revenue growth in the technology sector b) steady recovery in loan growth, as well recovery and upgrade in the asset quality of most private sector banks (except Bandhan), c) higher commodity prices and volume growth in the energy and metal sectors, and d) opening up of the economy which boosted consumer and retail growth. Nifty profit for the 34 companies that have announced their results grew 22% YoY (v/s estimate of 13% YoY). On the other hand, for the 127 companies in the MOFSL Universe, profit grew 26% YoY (v/s estimate of 19% YoY).

Excluding Bandhan (INR 30b loss due to higher provisioning), the MOFSL PBT/PAT growth stood at 33%/31% YoY (v/s estimate of 25%/19% YoY ). 44 companies within our coverage universe witnessed an upgrade of more than 3%, while 37companies saw a downgrade of more than 3%, leading to close to 5:4 upgrade to the downgrade ratio. MOFSL EBITDA margin (ex-financials) contracted by 140bps from 18.8% YoY to 17.4% YoY.

* Nifty EPS remains largely unchanged: The Nifty EPS for FY22E/FY23E saw a minor tweak to INR 731/INR873 (from INR 730/874). The FY22 EPS upgrade for BPCL, Titan, IT companies and private banks was negated by downgrades for Asian Paints, autos and insurance companies.

* Key drivers of 2QFY22 performance:

[1] IT- Indian IT services delivered one of its bestever quarterly performances with a sequential revenue growth of 4.8% (USD). Moreover, stable deal wins and the upbeat commentary on overall tech spending provide high visibility for future growth.

[2] Oil & Gas (O&G) – The performance of OMCs was driven by a better-than-expected margin performance, led by both higher reported GRM and higher-than-estimated marketing margins. Sales volume witnessed a demand recovery post the second COVID wave.

[3] Autos – High raw material inflation and operating deleverage impacted the sector’s 2QFY22 results. OEMs (MSIL, Bajaj and TVS) reported a commodity cost impact of 2-4pp QoQ, but expect semiconductor supply to improve from the 2QFY22 levels.

* KEY SECTORAL INSIGHTS:

[1] Technology: 2QFY22 marked the fifth quarter of a robust QoQ revenue growth; 12 out of 13 companies reported in-line/higher-than-estimated PAT. Strong demand led to one of the highest-ever headcount additions of 79K in 2Q, providing further reassurance on the growth ahead.

[2] Private Banks: Most private banks demonstrated a steady recovery in loan growth, led by the Retail, SME and Business Banking portfolios. Most banks also reported a decline in GNPA/NNPA ratio due to higher recoveries/upgrades during the quarter.

[3] Consumer: All the companies (except for APNT) delivered sales that were in-line or ahead of our estimate. Discretionary consumption picked up, while the staples showed steady momentum. However, the gross margin continued to be impacted by high inflation in several commodity prices.

[4] Cement: Cement companies reported an aggregate sales volume growth of 6% YoY with companies under our coverage recording an increase of 6% YoY in blended realisation. However, the EBITDA margin contracted by 340bps YoY on account of a) higher increase in pet coke/coal prices, b) higher freight costs, and c) normalisation of other expenses.

Key 2QFY22 result highlights

* 34 Nifty companies reported a sales/EBITDA/PBT/PAT growth of 34%/17%/27%/22% YoY (v/s est. 27%/14%/19%/13% YoY). Out of these, 15 companies surpassed our PAT expectations and 10 companies missed our PAT estimates. On the EBITDA front, 13 of these companies exceeded our expectations and 10 companies missed our estimates.

* For companies within the MOFSL Universe, sales/EBITDA/PBT/PAT growth stood at 32%/18%/28%/26% YoY (v/s est. 26%/17%/24%/19% YoY). Excluding Bandhan, the companies within the MOFSL universe recorded a sales/EBITDA/PBT/PAT growth of 32%/19%/33%/31% YoY (v/s est. 26%/17%/25%/19% YoY).

* The earnings upgrade/downgrade ratio for 2QFY22 stood at 5:4 despite higher commodity prices. 44 companies in our coverage universe witnessed an upgrade of more than 3%, while 37 companies saw a downgrade of more than 3%.

* Among the Nifty constituents, Axis Bank, ICICI Bank, IndusInd Bank, Kotak Bank, Larsen & Toubro, Shree Cement, Nestle, Dr. Reddy’s Lab, JSW Steel, BPCL, IOC, RIL, Titan, Tech Mahindra, and Wipro exceeded our profit estimates. On the other hand, MSIL, HDFC Life, SBI Life, Bajaj Finance, Ultratech Cement, Asian Paints, Tata Consumer and UPL missed our profit estimates.

* Nifty EPS estimates remained unchanged as FY22/FY23 EPS estimates stood at INR731/INR873 from (INR 730/INR874). BPCL, Shree and Titan saw a double-digit upgrade in FY22 EPS estimates, while Asian Paints, Maruti, SBI Life and HDFC Life Insurance saw a double-digit downgrade.

* Within the MOFSL Universe, at the sector level, Retail, Oil& Gas, Cement, IT, and Telecom recorded FY22 earnings upgrade of 17%/6%/2%/1%/1%, respectively. On the other hand, Life Insurance, PSU Banks, Autos, Metals, Private Banks, Healthcare, Speciality Chemicals, and Consumer witnessed an earnings downgrade.

* View: Companies largely delivered on the earnings front (except for autos), markets saw increased volatility on rising energy prices and inflation concerns. Most companies have indicated of recovery in demand as the economy opened up although higher commodity and energy prices have exerted downward pressure on margins. Companies have taken price hikes to pass on the impact of commodity costs, and the impact on demand elasticity remains to be seen.

Globally, central banks have begun shifting their focus on inflation with the Bank of Canada abruptly ending QE. The Fed is likely to announce a taper schedule during its November meeting that can cause a further increase in volatility. Nevertheless, companies have delivered a resilient quarterly performance in an inflationary environment and 2QFY22 earnings surpassing our expectations so far. O&G, PSU Banks, NBFC, Healthcare and Retail earnings were ahead of our estimates, while IT, Consumer Staples & Durables, and Cement reported earnings in line with our expectations.

Autos have largely underperformed during the quarter. With COVID-19 vaccinations crossing the 1.06b mark, urban recovery is likely to see a strong revival as COVID cases remain low. Despite the recent correction, Nifty continues to trade at Nifty currently trades at 20.5x FY23 estimates. We continue to remain Overweight on BFSI, IT, Consumer, Metals, Cement and Capital Goods, Neutral on Auto, Telecom and Healthcare, and Underweight on Energy and Utilities.

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