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 India Inc's Q4 earnings have met heightened expectations, but FY22 revenues pose a mixed picture, said HDFC Securities in a report.

Accordingly, commodity consumers are starting to see earnings cut, given falling aggregate demand and rising RM costs while commodity producers (metals and upstream oil and gas) are witnessing sharp upgrades due to higher commodity prices.

"Like Q2 and Q3, 70 per cent of our coverage stocks have beaten estimates. However, given the muted outlook for 1HFY22 amidst the second wave of Covid, earnings' estimates for FY22 or FY23 are largely unchanged," the report said.

"Despite a strong second Covid wave, Nifty consensus of FY22 EPS remains largely unchanged because the impacted sectors have a low weight in aggregate earnings; this would not change unless banks see a material cut in earnings."

As per the report, Nifty is trading at '20x FY22 EPS' after building in '37 per cent EPS' growth in FY22, which can still come through, aided by global cyclicals and select large banks.

"So, while overall EPS estimates are less at risk despite the second wave, the composition of earnings will change with high PE sectors likely to see earnings cut and low PE sectors seeing earning upgrades.

"Thus, Nifty PE has drifted down in the past three months despite EPS moving up," the report added.

According to the report, management commentaries on 2HFY22 normalisation or recovery remain cautiously optimistic.

"We believe aggregate consumption demand may not see a sharp recovery like in the previous year, given the likely absence of pent-up demand this time."

It said while second wave might have peaked out, progress of monsoons and vaccination program will be critical factors to look out for over the next three months to determine the pace of demand normalcy.

"We believe this will remain a stock pickers' market in FY22 with bottom-up positive risk-reward investment ideas still available across most sectors. Our preference is for mid/small caps and economy facing sectors, which will benefit as markets start looking at FY23 and beyond.

"Our preferred sectors continue to be IT, large banks, cement, consumer durables, infrastructure, gas, insurance and capital markets while we remain underweight on consumption, NBFCs and oil," the report added.