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4QFY21 results review: A strong close to FY21

Cyclicals lead the beat; earnings estimates stable despite higher downgrades

* Corporate earnings in the last quarter of FY21 continued the momentum of the preceding two quarters and ended the year on a good note, aided by the deflated base in 4QFY20 and healthy demand recovery for a large part of 4QFY21. However, 1QFY22 has seen a familiar disruption, with the second COVID wave engulfing India and several states imposing lockdowns in Apr’21 and May’21. The trend of earnings revision has changed in favor of downgrades again in 4QFY21 after two consecutive quarters (2Q and 3QFY21) of upgrades. The downgrade-to-upgrade ratio stood at 1.6:1. The second COVID wave peaked in May’21 and active cases are currently 80% below its peak. Daily cases are trending at a three-month low. With the pace of vaccinations picking up and states unlocking again, confidence is gradually returning in corporate commentaries as we exit 1QFY22.

* 4QFY21 has been an in line earnings season for MOFSL’s Universe. ~40% of companies in MOFSL’s coverage universe have beaten estimates, while 34% missed our estimates.

* Nifty sales were in line (16% YoY; est. 18%), while EBITDA/PBT/PAT growth stood at 32%/85%/76% YoY (est. 27%/75%/63%). Of the Nifty constituents, 37% reported a beat to our PAT estimates, while 31% posted results below our expectations.

* MOFSL’s Universe reported sales/EBITDA/PBT/PAT growth of 16%/37%/98%/76% YoY (est. 19%/35%/91%/72%). On a two-year CAGR basis, MOFSL’s Universe reported an EBITDA/PBT/PAT growth of 14%/17%/18%. Around 11 sectors posted double-digit, or a higher two-year profit CAGR. The prominent ones being Metals (60%), Private Banks (26%), Healthcare (25%), Cement (24%) and Consumer Durables (21%).

* We have revised our FY22E/FY23E Nifty EPS estimate upward by 2.6%/1.4% to INR746/INR872 (earlier: INR726/INR861). The upgrades are entirely led by Metal companies. Excluding Metals, Nifty PAT for FY22E/FY23E would have seen cuts of 2.2%/0.4%. Nifty EPS grew 14.2% YoY to INR539 in FY21 – the highest since FY11.

* Key factors that drove the earnings beat v/s our expectations comprise: 1) Metals earnings were up 4.2x YoY and have contributed 26% of incremental PAT growth on strong pricing and volumes. The deleveraging trend continues on the back of robust OCF generation. 2) Automobiles, largely led by low base and global cyclical names, benefitted from a strong global recovery. 3) The healthy performance in Private Banks and NBFCs can be attributed to moderation in slippages and improved efficiency in disbursement/collection. 4) IT companies saw a continuous improvement in order book and deal wins on robust demand. 5) O&G, led by OMCs, benefitted from inventory gains and higher GRMs and marketing margins.

* Autos, Cement, Consumer Durables, O&G, and Utilities reported a beat on our 4QFY21 estimates, while Consumer, Private Banks, Healthcare, Metals, and IT were in line.

* FY21 highlights: Sales/EBITDA/PBT/PAT grew (-5%)/17%/32%/23% YoY for Nifty constituents in FY21. For MOFSL’s Universe, sales/EBITDA/PBT/PAT rose (- 5%)/16%/33%/23% YoY. Metals (+210%), Autos (+43%), Healthcare (+35%), Private Banks (+31%), and Cement (+23%) were the standout performers in FY21.

* Sectoral highlights – MOFSL’s Technology Universe posted healthy in line earnings, with revenue growth of 3.7% QoQ. Most companies reported strong deal wins and improved visibility on growth going forward.

* The Metals Universe reported results in line with our expectations (316% YoY growth), led by higher steel prices and volumes, partly offset by greater iron ore prices. Strong free cash flow generation, on the back of robust profitability, was utilized for further deleveraging by companies. Non-ferrous companies benefitted from higher LME prices, while commodity input prices were relatively stable.

* MOFSL’s Private Banks Universe reported 99% YoY PAT growth. Most Banks reported a strong sequential pickup in loan growth, led by healthy trends in Retail. Most Banks reported an improvement in asset quality ratios from pro forma numbers reported in Dec’20, with slippages declining sequentially. Large Banks continue to maintain high COVID-related provision buffers v/s midsized peers. Performance of the NBFC Universe was below our expectations, with PAT growth of 42% YoY (est. 66%).

* The Consumer Universe posted a PAT growth of 23% YoY (est. 20%), led by a strong demand recovery. Around 15 of 18 companies reported double-digit sales growth in 4QFY21. EBITDA performance was underwhelming, led by sharp inflation, especially in the non-Agri basket. Consumer Durables reported 75% YoY growth (est. 62%) as Voltas, Whirlpool, Orient Electric, and Blue Star posted results above our expectations.

* The Healthcare Universe reported a PBT/PAT growth of 36%/37% YoY, led by: a) continued improvement in Domestic Formulation sales, b) no adverse impact on gross margins due to price increases and changes in product mix, and c) savings in staff costs and other expenses due to lower promotional expenses.

* MOFSL’s Cement Universe reported results well above our expectations (69% YoY growth in profit v/s our estimate of 55%), aided by: a) strong demand from Real Estate and Infrastructure, b) higher realization on firm prices, and c) strong margins, supported by better fixed cost absorption (from higher volumes).

* MOFSL’s Automobiles Universe posted a PBT/PAT of INR157b/INR134b v/s INR6b/INR(-19b) in 4QFY20, led by Tata Motors. Growth in Tractors (+59%), 2Ws (+26.5%), PVs (+32%), M&HCVs (+62%), and LCVs (+33%) were positive on a YoY basis, while 3Ws (-14%) declined moderately. Several OEMs faced commodity cost pressures as RM costs increased (340bp YoY/130bp QoQ) for almost all companies in 4QFY21.PAT for our O&G Universe rose 72% YoY (est. 17%), led by recovery in GRMs for OMCs.

* Sector-level earnings revision for MOFSL’s Universe: Metals, Healthcare, and Cement saw FY22E earnings upgrades of 60%, 2%, and 1%, respectively. Retail, Capital Goods, Consumer, Consumer Durables, and O&G saw FY22E earnings downgrades of 37%, 11%, 6%, 10%, and 8%, respectively.

* Top upgrades (FY22E): Tata Steel (147%), JSW Steel (50%), Hindalco (19%), Axis Bank (12%), Dr. Reddy’s Labs. (11%) and Sun Pharma (9%).

* Top downgrades (FY22E): BPCL (-20%), IndusInd Bank (-17%), Titan (-12%), Cipla (- 12%), Maruti (-11%), IOC (-11%), and Bajaj Finance (-11%).

* Corporate earnings in 4QFY21 were led by cyclicals and a combination of low base and strong demand revival as economic activity improved. Corporate India displayed tremendous resilience in FY21, with the Nifty ending the year with a healthy (14%) earnings growth, which was unthinkable a year back.

* The second COVID wave in AprMay’21 has soured sentiments and impacted economic activity. Since the restrictions this time was localized and less stringent v/s the lockdown in CY20, we expect the impact in 1QFY22 to be contained. We expect earnings momentum to accelerate in FY22 as the pace of vaccinations picks up and the economy opens up further. BFSI and commodities are expected to drive FY22E earnings. The market has been strong and largely looked through the second COVID wave on the back of strong liquidity and robust participation from non-institutional investors.

* The recent commentary by the Fed on earlier than anticipated tapering and India’s elevated CPI print have rattled some nerves, even as equity-bond yield dynamics are not showing any red flags. Nifty valuations at 21x FY22E EPS are rich and demand consistent earnings delivery ahead. In our model portfolio, we are OW on BFSI, IT, Metals, and Cement; Neutral on Consumer, Auto, Healthcare, and Capital Goods, and UW on O&G and Infrastructure.

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