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2QFY22 results review: Cyclicals drive earnings beat

Margin pressures evident; Nifty FY22E/FY23 EPS stable

* Corporate earnings for 2QFY22 came in above MOFSL expectations, singularly led by commodities such as Metals and Oil & Gas. Excluding these two sectors, aggregates were in-line. The quarter brought to the fore two important trends: (a) an improving demand environment post the opening up of the economy and rising vaccinations, and (b) the impact of rising input costs on operating margins. Thus, the operating margins of Specialty Chemicals, Autos, Cement, and Consumer Staples contracted. For the MOFSL Coverage Universe, the earnings upgrade to downgrade ratio for FY22 stands at nearly 1:1 as 51 companies saw earnings upgrades of >5%, while 55 companies were downgraded by >5%. Management commentaries indicated an improvement in the overall demand scenario, albeit with caution around operating margins, given the inflationary input price environment.

* ~45% of the companies in the MOFSL Coverage Universe beat our estimates, while 30% missed our estimates.

* 2QFY22 Nifty sales/EBITDA growth were in-line at 31%/21% YoY (v/s est. 25%/20%YoY), while PBT/PAT growth came in at 40%/36% YoY (est. 31%/25%). Among the Nifty constituents, 48% beat our PAT estimates, while 28% missed expectations. ExMetals and O&G, Nifty profits posted 13% YoY growth (in-line).

* The MOFSL Universe reported sales/EBITDA/PBT/PAT growth of 31%/21%/39%/38% YoY (est. 25%/20%/32%/27%). Ex-Metals, sales/EBITDA/PBT/PAT growth for the MOFSL Universe came in at 28%/11%/20%/18% YoY (v/s est. 22%/10%/13%/9% YoY). Ex-Metals and O&G, MOSL profits grew 13% v/s the expectation of 11% YoY growth. On a two-year CAGR basis, the MOFSL Universe reported EBITDA/PBT/PAT growth of 16%/29%/28%. Around nine sectors posted double-digit or higher two-year profit CAGRs – the prominent ones among these are Metals (223%), PSU Banks (98%), Cement (33%), Private Banks (25%), O&G (24%), Healthcare (18%), Consumer Durables (12%), and Technology (12%).

* Nifty FY22E/FY23E EPS estimates remained steady at INR730/INR873 (earlier: INR730/INR874). Downgrades in FY22 EPS in the Autos, Consumer, and Metals sectors were compensated by upgrades in O&G, Healthcare, and BFSI.

* Key highlights: 1) Technology: 2QFY22 marked the fifth quarter of robust QoQ revenue growth; 12 of 13 companies reported in-line/higher-than-estimated PAT. 2) O&G: Led by OMCs, the segment posted a better-than-expected performance on the back of strong marketing margins. 3) BFSI: Most banks demonstrated steady recovery in loan growth, led by the Retail, SME, and Business Banking portfolios. The growth outlook and asset quality showed sequential improvement. NBFCs saw sharp improvement in disbursements and collection efficiency. 4) Consumer: 11 of 18 companies posted double-digit sales growth. Discretionary consumption showed strong recovery during the quarter. Gross margins, however, remained impacted by higher RM prices. 5) Cement: While demand remained flat QoQ due to the monsoons, profitability was impacted by high energy costs, freight costs, and an increase in other expenses.

* Among the major sectors, Capital Goods, PSU Banks, Healthcare, Metals, O&G, and Retail beat our 2QFY22 estimates, while Auto, Specialty Chemicals, and Private Banks came in below our estimates.

* Sectoral highlights – The MOFSL Technology Universe posted healthy in-line earnings, with USD revenue growth of 5.2% QoQ (INR). The IT companies in our Coverage Universe together added 79k employees, indicating the expectation of continued momentum in deal wins and a strong demand environment.

* The O&G Universe reported results above expectations (PAT at INR386b v/s est. INR287b), led by strong marketing margins for OMCs and healthy volume growth for CGDs. RIL’s O2C EBITDA came in 17% above MOFSL estimates, benefitting from fuel cracks, efficient product placement, and yield management.

* The MOFSL Private Banks Universe reported PAT growth of 3% YoY, largely due to the loss reported by Bandhan Bank. Ex-Bandhan Bank, Private Banks will have reported 26% YoY growth as the Retail, SME, and Business Banking segments reported growth. PSU Banks reported an improvement in asset quality, with the GNPA/NNPA ratio declining 75bp/20bp QoQ. PSU Banks reported a 72% increase in PAT YoY (est. 35%). NBFCs reported PAT growth of 25% YoY (v/s est. 22%).

* The Consumer Universe posted sales growth of 16% v/s our est. of 15% YoY. 13 of the 18 companies reported decline in EBITDA margins YoY on account of a sharp increase in raw material prices. PAT growth was in-line at 7% YoY v/s est. of 10% YoY. Consumer Durables reported 7% YoY growth (est. 10%) as Crompton, Orient Electric, Voltas, and Blue Star reported results above our estimates.

* The Healthcare Universe reported PBT/PAT growth of 4%/7% YoY, above our estimate of -1%/1% YoY. Sun Pharma, Dr Reddy’s, and Lupin reported results above our expectations.

* The MOFSL Cement Universe reported results in line with our expectations (12% YoY growth in profit v/s our estimate of 13%) as average EBITDA/t declined 11% YoY. To mitigate the rise in coal/petcoke prices, most cement companies took price hikes of INR10–40/bag across regions in Oct’21.

* The MOFSL Automobiles Universe posted 62% YoY decline in profits to INR28b v/s the expectation of INR35b in profit. Ex-Tata Motors, PAT declined 7.5% YoY. Among the OEMs, Eicher, Hero, M&M, and Escorts reported results above our expectations, while Maruti, Tata Motors, and TVS Motors came in below expectations.

* Sector-level earnings revisions for the MOFSL Universe stood as follows: Retail, PSU Banks, O&G, Technology, and Cement saw FY22E earnings upgrades of 22%, 7%, 7%, 1%, and 1%, respectively. Auto, Specialty Chemicals, Metals, and Private Banks saw FY22E earnings downgrades of 13%, 8%, 4%, and 4%, respectively.

* The top upgrades (FY22E) were as follows: BPCL (22%), Shree Cement (15%), Titan (13%), ONGC (11%), M&M (9%), IOC (9%), Wipro (7%), Sun Pharma (7%), SBI (6%), Tech Mahindra (6%), Hindalco (5%), and ICICI Bank (5%).

* The top earnings downgrades (FY22E) came in as follows: Tata Motors (Profit to Loss), Asian Paints (-23%), Maruti (-16%), Tata Steel (-7%), JSW Steel (-7%), Britannia (-7%), Axis Bank (-6%), Divi’s Lab (-5%), Bajaj Finance (-5%), Eicher Motors (-5%), and Bajaj Auto (-5%).

* View: Corporate earnings in 2QFY22 were largely led by a) cyclical sectors (such as O&G and Metals), b) improved asset quality in the BFSI sector, and c) strong topline growth in the Technology sector. Management commentaries across the board suggest an improved demand environment. High energy and raw material prices, however, continue to be a concern. Globally, inflation concerns have dominated headlines on the back of rising commodity and energy prices – the Fed also announced tapering by USD15b/month. Nifty valuations at 20.7x FY23 forward EPS remain rich. However, Nifty FY22/FY23 estimates have seen no material downgrades in FY22YTD, despite elevated expectations. We remain Overweight on BFSI, IT, Consumer, Metals, Cement, and Capital Goods; Neutral on Auto, Telecom, and Healthcare; and Underweight on Energy and Utilities.

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