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* ‘Look through earnings’ of NSE 200 index portfolio more than doubled (107% yoy) in Q4FY21 so far largely driven by cyclicals. Our earlier note (Link) articulated that this trend will continue over FY21-23 as bulk of the look through earnings contribution for NIFTY50 portfolio would be from cyclicals.

* PAT to GDP for listed space rises to four year high of 2.6% largely driven by reduction in loss pool and depressed earnings. Significant contribution to earnings pool trajectory by cyclicals will boost ‘PAT to GDP’ further over FY21-23 as NIFTY50 earnings growth will outpace nominal GDP growth.

* Earnings outlook resilient:

Despite the severe health impact of second covid wave, NIFTY50 FY22 EPS outlook has remained resilient at ~730 so far indicating expectations of limited impact to headline benchmark index earnings. This is in contrast to FY22 GDP downgrades seen so far by various agencies. Q4FY21 results are largely in-line so far with mostly neutral results and beats/misses evenly balanced.

* Micros to macros:

We believe the key reason for resilient headline index earnings outlook compared to GDP is that much of the economic impact has been in the unorganised sector and largely limited to economic activities like leisure, travel and retail which have relatively lower earnings weight in the headline NIFTY50 index. ‘Spillover effect’ of the above mentioned impacted sectors via GNPAs is also limited to exNIFTY50 financial intermediaries while large financials in the index have managed to insulate themselves and have reported robust performance.

* Impact on investment and manufacturing side of the economy is limited to the shortage of migrant labourers and supply chain disruptions which have been much lower than during the first wave. Across the board, input cost pressure has not dented earnings outlook indicating the ability to rationalize and pass on cost which is corroborated by elevated WPI at 7.6% over FebApr’21 (indicator of pricing power for manufacturers).

* Earnings downgrade for FY22 in our coverage universe corroborates the above with downgrades primarily from;

* Discretionary consumption (NIFTY50: Maruti, Titan, RIL- retail; Ex- NIFTY50: Avenue Supermarts, Pidilite, Trent, Westlife, INOX Leisure)

* Ex-NIFTY50 financials (Yes Bank, Bandhan Bank, M&M Financial services)

* Key industrial stocks witnessing downgrades include Larsen & Toubro, Voltas, KEC International.

* FY22 earnings upgrades: Capex related (cement, steel, building material and partly paints), large private banks and exports stocks (auto, IT) have contributed to earnings upgrades so far.

* High frequency indicators showing impact on consumption demand; some of which could lead to pent-up demand later in the year:

Impact of the second covid wave is showing up on high frequency indicators such as mobility, E-way bills and Auto sales. On the flip side, positive surprise includes robust PMI for both services and manufacturing, strong exports data and high GST collections.

* Covid status:

Currently, the second wave in India appears to have peaked out at a daily infection rate of 0.4mn and is now showing signs of slowing down. While vaccine coverage has reached 143mn (at least one dose), we believe, natural immunity through infections could be much higher than the official recovery cases of 21mn. However, even if we assume actual infections and recovery are 10x of the official tests, the total number of vaccinated people and those with natural immunity due to infections are nowhere close to the herd-immunity (353mn = 143 + 21x10) with the assumption that the above two sets are mutually exclusive.

* Forward P/E valuations climb down from +1 s.d. levels due to ‘time value of money’ from rolling forward earnings base and market consolidation since Feb’21. Credibility of rolled forward earnings has improved significantly over the past one year given the consistent beats / in-line results. P/B is closer to LTA.

* Institutional flows on a 30-day cumulative rolling basis indicate FPI selling is stagnating at US$1.9bn while DII inflows are showing improving trend to reach US$1.7bn.

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