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4QFY21 Earnings Review: 78 companies profit growth stood at 47% YoY v/s exp. of 51% growth: Motilal Oswal Financial Services

According to the India Strategy 4QFY21 Earnings Review Report by Motilal Oswal Financial Services Limited (MOFSL), Nifty profits for the 27 companies that have posted their results have grown 50% YoY (v/s exp. of 49% growth). On the other hand, for the 78 companies in the MOFSL universe, profit growth stood at 47% YoY (v/s exp. of 51% growth). 4QFY21 was another strong quarter with earnings season that maintained the momentum of the 3QFY21 results season.

The advent of the second COVID wave has muddied sentiment and impaired the FY22E earnings visibility. With multiple states entering into extended lockdowns and restrictions, MOFSL see downside risks to their FY22 earnings estimates. The interplay of the resurgence in COVID cases and the pace of vaccination would decide the trajectory of economic recovery going forward. The Nifty now trades at 12M forward P/E of 19.4x, ~3% above its historical average of 18.8x. At 2.9x, Nifty P/B is well above its historical average of 2.6x. We are OW BFSI, IT, Metals and Cement, Neutral on Consumer, Healthcare, Auto, Telecom and UW on O&G, Infrastructure.

Key sectoral trends from 4QFY21 earnings

Technology

The management of Tier 1 companies guided for conservative double-digit revenue growth for FY22 (low teens in the case of Infosys), MOFSL believe this would increase over the course of the year, given the deal pipeline remains strong. They are confident that the sector would report growth in the mid-teens for FY22. MOFSL have downgraded their earnings for Tier 1 IT by 4% for FY22/FY23, as they build in some moderation in margins, led by increasing supply pressures in the industry.

Banks

With the resurgence in COVID-19 cases and lockdowns announced in various key states, collection efficiency has moderated in Apr’21, with some of the banks suggesting a 4–5% drop in collections over Mar’21. Banks remain watchful of both business growth and asset quality outlook in the near term. MOFSL mainly increase their earnings estimate for AXSB, while they cut their estimates in IIB, Bandhan, RBL, and AUBANK. MOFSL continue to prefer large private banks. ICICIBC, AXSB, HDFCB, and SBIN remain their top picks.

NBFCs

Business volumes are near pre-COVID levels for most of the vehicle financiers. NBFCs are reducing their dependence on traditional means and diversifying into newer borrowing sources, such as retail NCDs and ECBs. Decline in cost of funds and yields is likely to result in stable margins in the ensuing quarters. Asset quality has been resilient across companies, driven by robust collection efficiency and minuscule restructuring. MOFSL believe the provisioning cover across our Coverage Universe is more than adequate, and deterioration in credit costs is unlikely. For the coming year, they are uncertain about the impact of the second wave of the pandemic. However, we build in strong earnings revival in 2H, driven by better operating performances and controlled credit costs.

Consumer

With high commodity inflation seen during the quarter, most companies witnessed compression in gross margins. In addition, the revival of ad spends meant that there was considerable pressure on EBITDA margins. This was partially offset by cost savings initiated by companies in the previous quarters (due to COVID). However, restricted hours of operations at retail outlets have once again created uncertainty in the demand environment, especially for 1QFY22. Amid the rising COVID cases, managements are largely cautious on the near term due to the uncertainties involved, but have reiterated an optimistic view once the situation normalizes.

Auto

4QFY21 results have been impacted by RM cost inflation, reflected in the P&L. OEMs (MSIL, HMCL, TVSL, and BJAUT) have reported a commodity cost impact of 1.5–4pp QoQ, partially offset by price hikes and cost-cutting initiatives – leading to gross margin contraction of 80bp and EBITDA margin contraction of 110bp sequentially. Nevertheless, companies are optimistic about recovery in 2QFY22 – on the expectation that the situation would normalize with the ongoing vaccination drives. Commodity cost pressure is likely to sustain over the next couple of quarters; the current situation has rendered it difficult for companies to pass the cost to the customer via price hikes.

Cement

4QFY21 results have been impressive thus far, with companies that have reported results (ACC, Ambuja, UltraTech, and Dalmia Bharat) showing robust EBITDA growth of 52% YoY (47–63%). This has been driven by 26% YoY (21–28%) volume growth, ~4% YoY realization growth, and decline in total cost per ton – due to lower fixed costs and higher operating leverage, offset by higher power and fuel costs and freight costs.

Metals

Only Tata Steel/Hindustan Zinc has thus far reported results among the steel/non-ferrous companies. As expected, Tata Steel reported strong margins in India Steel operations, leading to 50%/99% QoQ growth in consolidated EBITDA to INR142b/INR76b. The near-term outlook for the sector remains strong, driven by sharp price increases over Apr–May’21 (thus far). This should drive Tata Steel’s FY22 EBITDA higher by 82% YoY. MOFSL expect other steel companies to also report strong margins and sharp debt reduction. Hindustan Zinc posted a strong quarter, with EBITDA/PAT growth of 19%/13% QoQ to INR38.8b/24.8b, led by higher LME prices and metal volumes.

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