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3QFY22 results review: In-line; BFSI and Cyclical steal the show

RM inflation weighs on gross margins; Nifty FY22E/FY23E EPS stable

* Corporate earnings for 3QFY22 came in line with MOFSL expectations. However, sectors reported a wide divergence as Autos, Cement, Consumer Staples and Durables, Specialty Chemicals, Healthcare and Metals were impacted by sharp raw material (RM) inflation. BFSI was the standout sector in this quarter aided by improvements in loan growth and disbursements, while asset quality improved sequentially propelled by moderation in slippages as well as healthy recovery and upgrades. IT Services saw another quarter of robust USD revenue growth (+4.6% QoQ), while the deal pipeline remained healthy and hiring momentum offered further visibility on demand.

* For the MOFSL Coverage Universe, earnings upgrade to downgrade ratio for FY23 turned adverse at nearly 4:5 as 39 companies saw earnings upgrades of >5%, while 50 companies were downgraded by >5%. Management commentaries indicated demand moderation in several rural oriented sectors even as rising RM inflation continued to impair margins.

* The beat/miss ratio for MOFSL Coverage Universe was unfavorable as ~36% of the companies beat our estimates, while 38% missed our estimates at the PAT level. At the EBITDA level, 26% of the companies reported a beat on our estimates while 37% of the companies reported a miss.

* For 3QFY22, the Nifty universe (comprising 49 companies that have reported results so far) posted in-line sales/EBITDA/PBT/PAT growth at 30%/15%/25%/25% YoY (v/s our estimates of 29%/18%/27%/26% YoY), respectively. For 9MFY22, the Nifty universe reported sales/EBITDA/PAT growth of 36%/24%/45% YoY, respectively. Among the Nifty constituents, 43% beat our PAT estimates while 24% missed. Ex-Metals and O&G, Nifty constituents clocked 12% YoY growth at the PAT level (in line with estimates).

* The MOFSL Universe reported sales/EBITDA/PBT/PAT growth of 28%/12%/24%/22% YoY (v/s our estimates of 29%/14%/24%/22%), respectively. Ex-Metals and O&G, sales/EBITDA/PBT/PAT growth for the MOFSL Universe came in at 12%/3%/14%/13% YoY (v/s our estimate of 10%/4%/11%/11% YoY), respectively. MOFSL universe posted 9MFY22 sales/EBITDA/PAT growth at 35%/25%/ 48% YoY, respectively.

* Nifty FY22E EPS cut marginally; FY23E EPS broadly unchanged: Nifty EPS for FY22E has been reduced by ~1% to INR735 (earlier: INR743) largely due to big downgrade in TTMT earnings. FY23E EPS has been broadly unchanged at INR874 (earlier: INR872) as downgrades in Autos, Metals and Consumer sectors were offset by upgrades in O&G and BFSI sectors.

* Key highlights: 1) Technology – 3QFY22 was a good quarter for Indian IT Services as companies under our coverage reported an overall QoQ topline growth of 4.6% (in USD), despite seasonality due to furloughs. The demand remains strong in the medium term. 2) Private Banks and NBFCs – asset quality trends improved. Most of the banks posted a decline in their NPL ratios, led by controlled slippages as well as healthy recovery and upgrades. NBFCs saw sharp improvements in disbursements and collection efficiencies. 3) Consumer – discretionary companies (Paints, QSR, Titan, Liquor, etc.) delivered strong double-digit topline growth while staples’ performance was muted as rural showed visible slowdown and margins were hurt by RM prices. 4) Cement – the sector was adversely impacted by weak volumes owing to unseasonal rains while high energy costs took a severe toll on margins and profitability. 5) Healthcare – after 12 quarters of growth, 3QFY22 marked the first decline in profits as rise in raw material costs due to supply disruption in China and continued price erosion ins US depressed profitability.

* Among the major sectors – Private Banks, NBFC, Logistics, Retail and Utilities reported higher-than-estimated PAT growth, while Autos, Cement, Consumer Durables, Healthcare and Metals reported PAT below our estimates in 3QFY22.

* Sectoral highlights – The MOFSL Technology Universe saw another quarter of robust USD revenue growth (+4.6% QoQ and 18.8% YoY) and strong deal wins. The deal pipeline remained strong, and the demand momentum was intact. Continued hiring momentum offered further visibility on demand and deal ramp-ups. The overall performance in a seasonally weak quarter is encouraging.

* The MOFSL Private Banks Universe reported PAT growth of 35% YoY, as loan growth picked up over the quarter driven by a sharp uptick in the Corporate portfolio. Fresh slippages moderated over 3QFY22. PSU Banks showed a strong loan growth of 3–7% QoQ, enabling margin improvement across the board. Asset quality improved due to controlled slippage and healthy recoveries/upgrades, resulting in a 40–100bp improvement in GNPA ratios. NBFCs reported 32% YoY PAT growth (v/s our estimate of 22%) as momentum across disbursements/collections remained healthy, albeit, the RBI NPA classification resulted in most lenders reporting an increase in GNPA/GS3.

* The O&G Universe posted higher-than-estimated results (PAT at INR418b v/s our estimate of INR409b), as better volumes offset lower marketing margins. BPCL-IOCL reported GRM of USD9.7-12.0/bbl (much ahead of our estimates). RIL’s O2C EBITDA, albeit, came in 7% below our estimate at INR139b (+60% YoY).

* The Consumer Universe reported 18% YoY sales growth (v/s our estimate of +13% YoY) aided by sharp price hikes. However, 13 of the 18 companies reported a YoY decline in EBITDA margin because of a sharp increase in raw material prices. PAT growth was in line at 6% YoY. Consumer Durables reported 15% YoY decline in profits (v/s our estimate of 4% growth) since Havells, Crompton, Orient, Voltas, and Whirlpool posted lower-than-expected results.

* The Healthcare Universe reported PBT/PAT decline of 7%/4% YoY, respectively, as rising raw material costs weakened the profitability of companies. For 3QFY22, 14 of the 23 companies reported results below our estimates.

* The MOFSL Cement Universe posted lower-than-anticipated results as profits declined 27% YoY (v/s our estimate of -19% YoY) and average EBITDA/t stood at an 11-quarter low of INR925. Rising energy costs adversely impacted the profitability of companies.

* The MOFSL Automobiles Universe reported 61% YoY decline in profits to INR55b v/s our estimate of INR73b. Ex-Tata Motors, overall PAT dipped 33% YoY (v/s our estimate of -37%). Among the OEMs, Bajaj Auto, M&M, MSIL and TVS beat our estimates, while Tata Motors, Ashok Leyland and Eicher missed our estimates.

* Sector-level earnings revisions for the MOFSL Universe stood as follows: Infra, O&G, PSU Banks, Logistics, Capital Goods and Retail saw FY23E earnings upgrades of 17%, 8%, 5%, 3%, 2%, and 2%, respectively. Healthcare, Autos, Consumer Durables, Utilities and Consumer sustained FY23E earnings cut of 4%, 3%, 3%, 2% and 2%, respectively.

* The top earnings upgrades (FY23E) were as follows: ONGC (29%), SBI Life (19%), Hindalco (7%), Cipla (6%) and MSIL (6%).

* The top earnings downgrades (FY23E) came in as follows: Tata Steel (-15%), Eicher (- 11%), Tata Motors (-10%), Britannia (-7%), Coal India (-7%), HDFC Life (-7%), and Dr Reddy’s (-5%).

* Our view: 3QFY22 corporate earnings were healthy given the context of unprecedented input cost headwinds. Healthy earnings were largely driven by: a) the BFSI sector due to improvement in asset quality and pick-up in loan growth, b) high energy prices that benefitted the O&G sector, and c) continued healthy delivery in the Technology sector. However, the focus has now shifted to global central banks as inflation has persistently remained high in developed markets and oil has crossed USD90/bbl. The recent Geopolitical flare up pertaining to Russia-Ukraine unnerved the near-term sentiments. The US 10-year bond yields have crossed the 2% level while the domestic 10-year yields trade at 6.7%. Despite the high inflationary environment, earnings have largely remained in line with expectations and Nifty FY22/FY23 estimates have not witnessed any material downgrades over the past six months. The RBI, meanwhile, has remained dovish in its Feb’22 policy and soothed the concerns of Bond markets where yields hardened sharply post-budget. Nonetheless, given the global and local macro construct of rising rates, higher crude prices, consequent higher inflation and bond yields, geopolitical flare-ups and rich valuations (Nifty trades at 20x FY23E EPS), we expect volatility to remain elevated and markets to stay sideways until earnings catch up with valuations. We continue to remain Overweight on BFSI, IT, Consumer, Metals, and Cement, and Underweight on Autos and Energy in our model portfolio.

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