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3QFY21 interim earnings review

Big beat and upgrades; upbeat commentary; Nifty EPS revised up by 2–4% for FY21/FY22

* 111 MOFSL Universe and 30 Nifty companies have announced their results as of 2 nd Feb’21. Companies that have reported earnings thus far comprise: (a) 70% of est. PAT for the MOFSL Universe, (b) 70% of est. PAT for the Nifty, (c) 62% of India's market capitalization, and (d) 81% of the Nifty 50 index weight.

* The 3QFY21 earnings season has maintained the momentum of the 2QFY21 results season – continued big beats and upgrades, and upbeat corporate commentaries have been reported across sectors and companies. Nifty profits for the 30 companies that have posted their results have grown 23% YoY (v/s exp. of 4% growth). On the other hand, for the 111 companies in the MOFSL Universe, profit growth stood at 32% YoY (v/s exp. of 13% growth). The beat in earnings in 3QFY21 came despite an unfavorable base v/s 2QFY21. 40 companies from our Coverage Universe have seen upgrades of more than 5%, while just 12 companies have seen cuts of more than 5%.

* What is driving the beat?

[1] Sharp demand recovery is seen with the opening up of the economy and the number of COVID-19 cases being contained, coupled with continued cost-saving initiatives;

[2] the festive season has boosted consumption demand across the Staples/Durables/Discretionary sectors;

[3] sharp rebound is observed in the cyclical sectors – Metals and Cement reported better-than-expected performances on elevated expectations;

4] IT companies reported another quarter of solid beats and upbeat commentaries, with bulging deal pipelines; and [5] the BFSI sector saw robust operational delivery, especially in the large-cap banks, with 70%+ PCR and minimal restructuring in the loan books. The earnings season is further supplemented by a progrowth budget, with the focus being on a) capital expenditure and infrastructure investments, b) multi-year fiscal expansion, c) several structural initiatives, and d) a stable taxation regime.

* KEY SECTORAL INSIGHTS:

[1] IT: Headline numbers are strong; 7 out of 12 companies have reported beats on a PAT basis, while 11 out of 12 have seen upward earnings revision for FY22. Companies’ deal pipelines have improved further v/s 2QFY21, now at pre-COVID levels / stronger, indicating a demand uptick.

[2] Consumption: Most companies have reported strong volume growth as demand recovery has led to strong beats on the topline and profitability.

[3] Metals: All five companies that have reported thus far have beaten expectations, led by higher underlying commodity prices and volumes.

[4] Banks: Large private banks have reported strong results, with asset quality remaining robust as well. The restructured portfolio remains at 0.25–0.5% of the total loan book – much lower than earlier envisaged.

[5] Cement: Healthy realization and cost savings have resulted in 100% profit growth for the Cement Universe thus far – even as inflationary pressures in some cost items are now evident.

Key 3QFY21 result highlights

* The 30 Nifty companies have reported sales/EBITDA/PBT/PAT at -3%/19%/25%/23% YoY (v/s est. -3%/12%/9%/4% YoY). 18 of these Nifty companies have beaten our PAT expectations, while 5 have missed. On the EBITDA front, 16 have surpassed, 8 have missed, and 6 have met our expectations.

* For the MOFSL Universe, sales/EBITDA/PBT/PAT growth stands at -1%/24%/36%/32% YoY (v/s est. -2%/16%/19%/13% YoY).

* The earnings upgrade/downgrade ratio for 3QFY21 is skewed in favor of upgrades. 40 MOFSL Universe companies have reported upgrades of more than 5% (of which 20 companies have seen upgrades of more than 10%), while 12 have posted downgrades of more than 5%.

* Among the Nifty constituents, Bajaj Auto, Tata Motors, L&T, UltraTech Cement, Asian Paints, HDFC Bank, ICICI Bank, IndusInd Bank, HDFC, Cipla, Sun Pharma, JSW Steel, IOC, HCL Tech, Tech Mahindra, and Wipro have exceeded our profit estimates. On the flip side, Dr Reddy’s, HDFC Life, SBI Life, and Bajaj Finance have missed expectations.

* There has been a 3.9%/2.0% upgrade in FY21/FY22E Nifty EPS estimates to INR536/INR713 (from INR516/INR699). We are now building in Nifty EPS growth of 15% for FY21E.

* Within the MOFSL Universe, at the sector level, Auto, Banks, Consumer Durables, and Technology have seen earnings upgrades of more than 5%. On the contrary, Life Insurance and Oil & Gas have sustained earnings downgrades

* View: Continued demand improvement, coupled with cost rationalization, has been the key highlight of the 3QFY21 earnings season. Earnings growth and upgrades have been broad-based, with almost all of the mainstream sectors beating our expectations. As discussed in our 3QFY21 Strategy preview, the cyclical sectors are driving incremental earnings. Government focus on fiscal expansion and capex spending augurs well to revive the long-anticipated private investment cycle. We expect the earnings momentum to sustain with further revival in the economy, the number of COVID-19 cases being contained, and the benefit of a low base ahead. The Nifty at 20.7x FY22 EPS is not inexpensive anymore and demands consistent earnings delivery ahead. In an otherwise buoyant macro and micro context, rising bond yield may cap equity valuations. Therefore, the earnings delivery assume greater importance to sustain these valuations.

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