IGI Logo

3QFY22 interim earnings review

Results in line with our expectations; RM inflation impacts EBITDA margin; Nifty FY23E estimates unchanged

* 120 companies in the MOFSL Universe and 34 Nifty companies have announced their results as of 2nd Feb’21. The companies that have reported their earnings so far comprise: a) 63% of estimated PAT for the MOFSL Universe, b) 69% of the estimated PAT for the Nifty, c) 57% of India's market capitalization, and d) 82% weightage in the Nifty.

* In the 3QFY22 earnings so far, we have seen a wide divergence between sectors affected by rising raw material prices (Consumer Staples and Durables, Cement, Auto, and Metals) and those not directly impacted by rising prices (Private Banks, NBFCs, and Technology). Most Private Banks have reported an improvement in asset quality, led by controlled slippages and healthy recovery and upgrades. Most Tier I IT companies reported strong topline growth and a robust deal pipeline driving strong sales growth. Rising prices and grammage reductions have impacted volumes in Consumer Staples, while rising RM prices hit gross margin. Profit for the 34 Nifty companies that have announced their results so far grew 10% YoY (est. 12%). Excluding TTMT, the profit for these Nifty companies would have grown by 15% YoY (est. 15%). For the 120 companies in the MOFSL Universe, profit grew 13% YoY (est. 15%). Around 27/38 companies within our coverage universe witnessed an upgrade/downgrade of more than 3% each, leading to an adverse upgrade-to-downgrade ratio of 3:4 for FY23E. MOFSL EBITDA margin (excluding Financials) contracted by 300bp to 14.7% YoY.

* Nifty FY22E EPS cut by 2.5%; FY23E EPS estimate remains unchanged: Nifty EPS estimate for FY22E has been cut by 2.5% to INR725 largely due to TTMT. FY23E EPS estimate remains unchanged at INR 872 (INR872 earlier) as downgrades in Metals and Autos have been compensated by upgrades in the O&G.

* Key drivers of the 3QFY22 performance: 1) IT: 3QFY22 was a good quarter for Indian IT Services as companies under our coverage reported an overall growth of 4.6% (USD), despite seasonality due to furloughs. The demand environment remains strong in the medium term. Most companies delivered good deal wins and highlighted a strong pipeline, with a larger number of shorter term deals. 2) Private Banks: Asset quality trends have improved. Most Banks reported a decline in their NPL ratios, led by controlled slippages and healthy recovery and upgrades. 3) Consumer: Volume growth in Staples was weak, led by the inflationary impact on volumes, reduction in grammage to pass on material cost increases, and slowdown in rural demand. Consumer Discretionary, however, saw faster growth due to improved mobility and pickup in the pace of consumption during the festive season.

* Key sectoral insights: 1) Technology: 3QFY22 marked the sixth quarter of robust QoQ revenue growth, with 11 out of 13 companies reporting an in line/above PAT growth. Companies indicated that attrition has peaked. On a quarterly annualized basis, we should see a moderation in LTM numbers in a few quarters. 2) Private Banks: Loan growth for most Private Banks has accelerated in 3QFY22, led by a sharp pickup in the Corporate portfolio, while growth in Retail, Business Banking, and SME segment stood healthy. 3) Consumer: Among the results declared so far (12), companies have delivered sales growth largely in line with our estimates. Continued higher commodity inflation in 3QFY22, led to a significant pressure on gross margin YoY, despite companies taking some price hikes. 4) Healthcare: 3QFY22 sales/EBITDA/PAT reported till date was largely in line with our estimates on an aggregate basis. Price erosion continues to affect the US Generics business. On the Domestic Formulation front, 3QFY22 was largely a quarter with minimal COVID-related business, with 13% YoY growth on an aggregate basis. The reduced restrictions on travelling enabled better marketing efforts, driving sales in the DF segment for all companies.

Key 3QFY22 result highlights

* 34 Nifty companies reported a sales/EBITDA/PBT/PAT growth of 31%/9%/12%/ 10% YoY (est. 30%/13%/14%/12%). Of these, fifteen/nine companies surpassed/missed our PAT estimates. On the EBITDA front, eight/eleven of these companies exceeded/missed our estimates.

* For the 120 companies within our MOFSL Universe, sales/EBITDA/PBT/PAT growth stood at 30%/9%/15%/13% YoY (est. 33%/13%/17%/15%). Excluding TTMT, companies within MOFSL Universe recorded a sales/EBITDA/PBT/PAT growth of 33%/12%/20%/ 18% YoY (est. 36%/15%/21%/18%).

* The earnings upgrade/downgrade ratio for 3QFY22 stood at 3:4 as margins were impacted by higher commodity prices. Around 27/38 companies within our coverage universe saw an upgrade/downgrade of more than 3% each.

* Among the Nifty constituents, Bajaj Auto, Maruti, Ultratech, HUL, Tata Consumer, Axis Bank, ICICI Bank, IndusInd Bank, SBI LIFE, Bajaj Finance, CIPLA, SUN Pharma, RIL and UPL exceeded our profit estimates. On the other hand, Tata Motors, Asian Paints, HDFC LIFE, Dr Reddy’s, JSW Steel, BPCL and Tech Mahindra missed our profit estimates.

* Nifty FY22E EPS cut by 2.5%; FY23E EPS estimate remains largely unchanged: Our Nifty EPS estimate for FY22E has been cut by 2.5% to INR725 largely due to TTMT. Our FY23E EPS estimate remains unchanged at INR 872 (INR872 earlier) as downgrades in Tata Motors have been compensated by upgrades in Cipla, Maruti and ICICI Bank.

* Within the MOFSL Universe, at the sector level, Life Insurance/Capital Goods/Logistics recorded an FY23E earnings upgrade of 4%/3%/3%. On the other hand, Retail, Autos, Consumer, Specialty Chemicals, and Healthcare witnessed an earnings downgrade.

* View: Companies largely delivered on the earnings front, despite the unprecedented inflationary pressures from rising commodity and energy prices. Banks and NBFCs have reported stellar results on the back of an improvement in asset quality trends as well as a pickup in loan growth. IT remains steady, with strong topline growth. Globally, the interest rate and liquidity backdrop is turning adverse in the face of rising inflationary pressures. The Union Budget’s focus was on a revival in growth, led by: a) a boost to capital expenditure (capex) by enhancing the gross budgetary support for Roadways, Railways, and the Defense sector, and b) propelling the Manufacturing sector through PLI schemes, while transitioning the economy with an emphasis on Urban Planning, Logistics, EVs, solar module manufacturing, river linking, water connections, etc. Despite the recent correction, the Nifty continues to trade at 20.2x FY23E. We continue to remain Overweight on BFSI, IT, Consumer, Metals, and Cement, and Underweight on Auto and Energy in our model portfolio.

3QFY22 key sectoral trends

* Technology: 3QFY22 was a good quarter for IT companies and our coverage universe reported an overall growth of 4.6%, despite the seasonality due to furloughs. Tier II companies reported a better growth at 6.3% QoQ when compared to the 4.4% growth for Tier I companies. The demand environment for the medium term remains strong. Most companies delivered good deal wins and highlighted a strong pipeline, with a large number of shorter term deals. Though LTM attrition inched up across the industry in 3QFY22, the commentary from all companies indicated that attrition has peaked. On a quarterly annualized basis, we should see a moderation in LTM numbers in a few quarters. Utilization levels dropped for most of our coverage companies due to higher fresher intake as managements start focusing on rationalizing their pyramids and increase hiring in anticipation of strong demand. Headcount increase by ~75k cumulatively after the highest ever ~79k/~72k additions in 2Q/1QFY22 indicate sustained demand and provides a good visibility. Higher additions, lower utilizations, and wage hikes to combat the high attrition led to a 100bp contraction in cumulative EBIT margin for our coverage companies. Management commentaries have highlighted a strong tech spending environment, with a higher focus on Cloud migration and Digital transformation deals. We are confident that the sector would report high teen growth in FY23. We have marginally cut our earnings for most Tier I (except INFO) IT players due to margin pressures. We have upgraded our estimates for Tier II IT companies (barring LTI, LTTS, and COFORGE), given their strong growth trajectory.

* Banks: Most large Private Banks have reported their 3QFY22 earnings. The growth momentum has accelerated in 3QFY22. Asset quality trends have improved and most Banks reported a decline in their NPL ratios, while the restructured book also fell marginally. The improvement was led by controlled slippages and healthy recovery and upgrades as Banks continue to focus on collections. Loan growth has accelerated in 3QFY22, led by a sharp pickup in the Corporate portfolio, while the growth in Retail, Business Banking, and the SME segment remained healthy. The quarter saw a healthy revival in the Unsecured Loan segment, aided by record spending on Credit Cards, while the Personal loan segment reported robust growth. Deposit growth stood relatively modest, though CASA ratios improved broadly, with select SFBS like AUBANK reporting a 900bp QoQ increase in its CASA mix. NII growth has picked up, led by healthy loan growth and improved margin (AXSB, KMB, and AUBANK). We expect the growth momentum to remain healthy, with a recovery in economic activity, while the capex cycle revives over FY23. We have slightly increased our earnings to factor in improved loan growth, margin, and healthy asset quality. We maintain our preference for ICICIBC, SBIN, and AXSB.

* NBFCs: Impact of the RBI NPA circular was more pronounced for vehicle Financiers and lesser so for Housing Finance Companies (HFC). Among Vehicle Financiers, the impact was relatively lesser for SHTF since it was already partly compliant with the RBI circular, while the impact was more pronounced for MMFS and CIFC. Demand momentum was strong (despite supply-side challenges) and all Vehicle Financiers reported a healthy YoY growth in disbursements. Collection efficiencies continued to improve in 3QFY22 for all lenders. However, a few lenders, with a regional focus in South India, said that collections in Oct-Nov’21 were impacted due to the unseasonal rainfall. Most lenders reported a stable (or a minor increase/decrease) restructured pool, suggesting that repayments from the restructured pool have not started as yet.

While 2W demand has not been strong, players like LTFH and SCUF reported healthy disbursements and seem to have gained market share. MSME lending and demand for Personal loans was robust as evident in the disbursements for respective players. Among large HFCs, both LICHF and HDFC witnessed a healthy growth in disbursement in Individual Home loans. However, the risk appetite of lenders as well as demand for Non-Individual/Wholesale loans remain slightly muted, given the stress that has built-up in the Wholesale Real Estate segment after the COVID-19 outbreak. Pressure on spreads/NIM for large HFCs will be an important monitorable in subsequent quarters. Affordable Housing Financiers exhibited an improvement in their 1+dpd metrics, but GS3 deteriorated because of the RBI NPA circular. There are early signs of a moderation in spreads/margin for Affordable/Large Housing Financiers. RBI’s NPA circular led to a lot of volatility in reported GS3/NNPA/credit costs and it will take an additional oneto-two quarters for the business ecosystem to align their collections team to RBI’s guidelines on NPA recognition. MUTH, CIFC, and CANFIN remain our preferred picks.

* Consumer: Among the results declared so far, APNT, BRIT, CLGT, DABUR, HUVR, JYL, MRCO, PGHH, PIDI, UNSP, UBBL and JUBI have delivered a sales growth that was largely in line with our estimates. Most companies (except CLGT, DABUR, and PGHH) reported double-digit sales growth, albeit on a soft base (impacted due to COVID-led restrictions) and led by price hikes in the last two-to-three quarters. Volume growth in Staples was weak, due to the inflationary impact on volumes, grammage reduction to pass on material cost increases, and slowdown in rural demand. Discretionary saw faster growth due to improved mobility and a pickup in consumption during the festive season. Continued high commodity inflation in 3QFY22 led to significant pressure on gross margin YoY, despite companies taking some price hikes. Revival in ad spends meant that there was considerable pressure on EBITDA margin as well. This was partially offset by cost savings initiated by companies in previous quarters to counter the effects of the COVID-19 outbreak. While HUVR delivered a profit above our estimate, APNT, PIDI, UNSP, and UBBL’s performance was below our estimate. With the rise in COVID-19 cases, due to the spread of the Omicron variant towards the end of 3QFY22, and moderation in rural consumption, volume and sales growth could be impacted in 4QFY22 as well. Operating margin is also likely to be impacted sequentially in 4QFY22, albeit to a lesser extent.

* Auto: Lower than expected RM cost inflation, price hikes, and operating leverage led to the beat in 3QFY22 results for OEMs. 3QFY22 marked a QoQ expansion in the gross margin for OEMs (MSIL and BJAUT), after witnessing continuous pressure for the last four-to-five quarters, driven by lower commodity cost inflation and price hikes. However, for Tyre manufacturers, higher cost inflation and weaker mix led to a continued contraction (250-300bp QoQ) in gross margin. While OEMs indicated a further moderation in RM cost in 4QFY22, Tyre players expected a QoQ increase in RM cost. Demand commentary was a mixed bag, with PVs remaining in a sweet spot due to a strong order book. CVs are seeing a sustained recovery across segments. 2Ws are seeing continued weakness in domestic demand. Semiconductor shortages are also slowly receding, with all OEMs expecting production in 4Q to be better than 3QFY22.

* Healthcare: The reported sales/EBITDA/PAT in 3QFY22 till date is largely in line with our estimates on an aggregate basis. The price erosion continues to affect the US Generics business. However, SUNP/CIPLA delivered mid-single digit growth YoY as well as QoQ in the US Generics business on the back of a robust pace of launches. This offset the price erosion and aided growth in this segment. Even DRRD exhibited YoY growth in the US Generics segment. Companies with a limited number of launches (AJP) and/or those facing regulatory issues (TRP) saw headwinds in the US Generics segment. Certain products require preapproval inspection. Thus, the postponement in USFDA inspection (as notified by the regulator) is impacting new approvals and increasing the risk to growth in the US Generics segment in the near term. Niche approvals remain the key for better outlook going forward. On the Domestic Formulation front, 3QFY22 largely saw minimal COVID-related business, with 13% YoY growth on an aggregate basis. The reduced restrictions on travelling had enabled better marketing efforts, driving sales in the DF segment for all companies. We upgraded our estimates for CIPLA (considering its superior performance in DF/US), but downgraded our estimates for DRRD/TRP (considering the price erosion). We largely maintain our estimates for SUNP/ERIS.

In line performance: RM inflation impacts margins

* Aggregate performance of the MOFSL Universe: Sales/EBITDA/PBT/PAT growth stood at 30%/9%/15%/13% YoY (est. 33%/13%/17%/15%).

* Top companies that surpassed our estimates: Bajaj Auto, Maruti, UltraTech, HUL, Tata Consumer, Axis Bank, ICICI Bank, IndusInd Bank, SBI Life, Bajaj Finance, Cipla, Sun Pharma, RIL, and UPL.

* Top companies that missed our estimates: Tata Motors, Asian Paints, HDFC Life, Dr. Reddy’s, JSW Steel, BPCL, and Tech Mahindra.

* Top FY23E upgrades: SBI Life (19%), Cipla (6%), Maruti (6%), ICICI Bank (4%), L&T (3%), and UltraTech (3%).

* Top FY23E downgrades: Tata Motors (-10%), Britannia (-7%), HDFC Life (-7%), Dr. Reddy’s (-5%), Tech Mahindra (-4%), and IndusInd Bank (-4%).

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer