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Q4 FY21 Earnings Preview

YSEC UNIVERSE: PAT TO GROW 77% Y/Y

* Revenue (ex‐financials) to grow at 9.2% y/y, primarily driven by consumer facing stocks, Infra and logistics. Base effect also remains favorable for all the sectors.

* For Financials, NIIs of Banks is expected to expand by 21% y/y, the highest in 8 quarters, spearheaded by strong performance from SBI. While NBFCs will lag in terms of NII growth.

* Despite rising input costs, we see operating margins to increase by 40bps sequentially in the wake of expanding revenues and better pricing power

* PAT (ex‐Financials) is likely to grow at 75% y/y, largely driven by strong performance from Oil & Gas sector. Barring building materials, all sectors will see expansion in earnings. We are seeing a 24% y/y de‐ growth for Building materials in Q4, as the number of corresponding quarter in FY20 was inflated by Tax reversal for Ultratech.

* Earnings of Financials (excluding non‐lending financials) are poised to double, manifested by 218% y/y growth for ICICI Bank. This will boost PAT of our coverage universe by 77% y/y basis.

NIFTY 50

* Although Q4 FY21 Nifty EPS growth is at record high of 150% y/y, the absolute EPS is replicating Q3 levels.

Sectorwise : Q4 FY21 Earnings Preview

AMC INDUSTRY

* Industry QAUM is expected to give stellar growth of 15‐16% on y/y basis mainly driven by healthy inflows in Debt schemes accompanied by strong equity market movement and base effect of last March where equity market saw a sharp fall.

* Share of Equity AUM gradually inching‐up, aiding yields to catch‐up on sequential basis and narrowing the yield gap on yoy basis.

* Profitability to remain strong on y/y basis by solid growth in top‐line and investment income which was adversely impacted in Q4FY20.

* CAMS is also likely to report healthy performance on a sequential basis driven by AUM growth and favorable product mix.

* NAM India and UTI AMC remains our top picks in this space.

LIFE INSURANCE

* Premium growth is likely to be strong for the industry during the quarter primarily on the back of a sharp slowdown witnessed in March 2020 owing to lockdown. Industry NBP was down 33% in March 2020.

* Product performance is likely to be a mixed bag, with non‐par continuing to witness strong growth, whereas protection is likely to witness a slowdown in terms of number of policies sold. ULIPs have gathered momentum in the past few months, while credit protection will see strong performance in line with improved retail lending.

* VNB Margin improvement on yoy basis is likely to be strong given that the share of protection and non‐par remains higher on yoy basis for most insurers.

* In terms of costs, the declining trend should continue given the control on rental and operating costs. However, stronger performance of agency channel in the quarter could lead to slightly higher costs sequentially.

* A key thing to watch will be the information on variances in the EV walk through. We expect positive variance coming from persistency as most players have indicated that ULIP persistency has been better than initially forecasted.

* SBI Life continues to be our top pick given strong growth expectations for premiums as well as move towards profitable products like Non Par and credit protection. Valuations at FY23E P/EV of 2x is very attractive.

GENERAL INSURANCE

* Growth in general insurance industry has been decent in the first two months of Q4 FY21. While the retail health, fire and marine have done well, other segments have witnessed relatively muted performance.

* Claim ratios in motor and health segments are likely to increase substantially on a sequential basis driven by higher number of vehicles plying on the street and rising number of elective surgeries in hospitals.

* Expense ratios are likely to be under control given that structural changes have been seen over the past couple of quarters.

* ICICI Lombard, while the current valuations are rich, its long term potential of delivering industry beating premium growth, reduction in combined ratios below 100% over the next couple of years and healthy RoEs of 17‐19% qualifies it to be a portfolio stock.

CEMENT AND BUILDING MATERIALS

* Strong performance by cement companies should sustain with yet another robust quarter. We expect overall volume growth for the industry to be in the vicinity of 16‐18% y/y for Q4FY21E led by buoyant demand scenario and low base.

* In terms of regional dynamics, we expect East to continue to outperform with demand growth of 23‐25% y/y during the quarter followed by North (+20‐22% y/y), Central (+18‐20% y/y), West (+14% y/y) and South (+3‐5% y/y). Overall, total volumes of companies under our coverage universe should witness a growth of 20.7% y/y.

* In terms of pricing, PAN India average realization is up 1% q/q largely led by surge in non‐trade prices across regions. Further, on y/y basis, average realization on PAN India basis should improve by 3% y/y. On sequential basis, sharpest hike has been observed in West (+4.4% q/q), followed by East (+2.4% q/q), North (+1.6% q/q), Central (flat q/q) while prices have slid by 2.7% q/q in South. Companies under our coverage should witness NSR improvement of 1.1% q/q and 2.9% y/y.

* In terms of cost, cement companies should experience pressure from surge in energy and freight costs. However, operating leverage should offset the hike in costs to certain extent. Overall, we expect EBITDA/te of companies under our coverage universe to stand at Rs 1,180; a decline by 2% q/q and improvement of 9% y/y. Absolute EBITDA should increase by 31.4% y/y and 7.1% q/q.

* In building material segments, we expect MDF category to continue its strong performance with volume growth expectation of 50‐55% y/y led by sturdy rural demand, aggressive product penetration strategies and reduction in imports due to ocean freight bottlenecks. We believe laminate industry to deliver a modest volume growth of 10‐12% y/y while ply industry should witness volume growth of 15‐17% y/y during the quarter.

CAPITAL GOODS & DEFENSE

* We expect Q4 FY21 to be a better quarter both sequentially as well as on y‐o‐y basis as economic activities have gained pace with demand almost back to Pre‐ Covid level.

* While Q4FY20 was affected due to pandemic which led to the dip in quarterly numbers, this time around exponential surge in cases has called for stringent lockdown‐like measures across the states; nevertheless, we expect the situation to alleviate as vaccination activity gains pace.

* The overall commentary across the companies suggests –

(i) there is an uptick in demand with growth almost back to Pre‐Covid levels; however, supply‐side issues persist,

(ii) post favourable budget, India is becoming a favourite destination for an export hub with investments by major global players

(iii) automation/digitalization would be the key focus area for the companies as companies are looking to improve operational efficiency

(iv) significant improvement in order pipelines in the domestic and international markets

(v) off‐late sentiments have been impacted due to increase in input cost led by surge in steel prices, fuel prices, and logistic issues (as containers are not moving on time).

* We believe, the companies having a healthy balance sheet, strong cash, and long‐ term scalability will have potential market share gains. Our capital goods sectoral top picks include AIA Engineering, and L&T.

* From the defence space, we believe DPSUs are favourably placed due to –

(i) Growth visibility backed by strong order book,

(ii) Debt‐free balance sheet owing to timely stage payments, and

(iii) attractive valuation with scope for re‐rating.

* Moreover, our recent interaction with defence experts suggests –

(i) Measures formulated by GoI to curb defence imports through various policy reforms have certainly boosted sentiments for defence manufacturing in India, (ii) Digitalization and AI has become the need for the armed forces for effective command, control and information

(ii) Going forward, funding for defence project would be potentially done through monetization of defence land and assets.

* Our top picks from defence segment are Bharat Electronics (BHE) & Mazagon Dock (MDL).

INFRASTRUCTURE

* Infrastructure companies are all set to end the year with the strong quarter backed by robust order inflow announced by the government agencies and pick‐up in execution.

* Many companies are sitting on the all‐time high orderbooks.

* Toll collection has improved despite some challenges due to farmer protest and the rising cases of COVID.

* Margins likely to remain steady. During the quarter, the major boost for the sector was announced by the government with higher budgetary allocation for sectors like Roads, Rail, Rural and Urban Infra.

LOGISTICS

* The demand for logistics continued in Q4 as most industries saw an upsurge in volumes. Many large players witnessed the business pick‐up well and have surpassed Pre‐COVID levels.

* The E‐way generation and Fastag collection too have surpassed the pre‐COVID levels, despite some disruption due to farmer protest. The sharp jump in the fuel prices was witnessed in Q3 which impacted the margins; however, many companies could pass on through better negotiations in Q4. Thus, margins are likely to stabilize.

* The business impact due to non‐availability of the containers and changes in validity of e‐way norms to be key monitorable.

INFORMATION TECHNOLOGY

* Revenue growth is expected to remain strong for IT companies driven by accelerated adoption of digital technologies and migration to cloud based solutions in the aftermath of this covid19 pandemic. The performance would be broad‐ based with improving traction across BFSI, Telecom, Healthcare, Manufacturing and Retail sectors would drive the revenue growth.

* Revenue growth is expected to be 4‐5% QoQ in USD term for tier 1 companies. INR appreciation against USD during the quarter would have adverse impact revenue growth in INR terms by around 1.4%. Vendor consolidation which has speeded up would favour big IT players compared to smaller peers.

* Wage hike in the quarter would adversely impact margin for Infosys, HCL Technologies and Wipro among tier 1 IT companies. This quarter would likely see sequential decrease in employee utilization led by increase in hiring across IT companies.

* Management commentary on FY22E guidance and the deal booking would be the key thing to watch out for in the quarter.

* In the midcap companies, L&T Infotech and L&T Technology services are expected to post industry leading sequential revenue growth rates in the quarter.

TELECOM AND INTERNET/PLATFORM

* The trend of moderation in subscriber decline for Vodafone Idea should continue in the quarter, with growth in ARPU driven by migration from 2G to 4G technology. Management commentary on any progress on fund raising activity would be the key thing to watch out for in the quarter.

* The need to increase data capacity on the part of telecom service providers would lead to addition of more co‐locations on the part of Indus Towers.

* For Internet companies, the sequential recovery would continue with robust growth in billings as ease in lockdown restrictions have helped in the growth of internet traffic to portals such as 99creas.com, Naukri.com etc.

* The rising digital penetration would support the overall performance of these Internet based companies. The pandemic has accelerated the market share gain internet based companies in their respective segments.

* Management guidance on growth in billings and competitive intensity in the segment would be the key things to watch out for in the quarter.

PHARMACEUTICALS

* Weak seasonality in domestic business for key companies like Dr Reddys’ and Alkem; expect India business to clock varied growth in the range of 4‐12%. DRRD would post 31% rise as Wockhardt precluded from base quarter YoY

* Frontline companies Lupin to see a softer US quarter as Albuterol, Levothyroxine likely to miss growth expectation based on third party US generic data for Jan/Feb. Lack of Tamiflu sales would also hurt in comparison to base quarter for LPC

* Dr Reddys’ should see a rebound in US revenues after a disappointing Q3 though YoY performance still tepid at +3%; Sun Pharma specialty sales would see an uptick based on Jan/Feb data for Ilumya

* US sales for smaller companies such as Alkem, Ajanta Pharma can see 11‐15% YoY growth on several approvals through FY21 and unlikely to surprise meaningfully either way

* Torrent is likely to witness 20%+ decline in US business YoY on persistent pressures due to lack of approvals; India business to grow 8% but margins to come off on negative operating leverage

* IPCA to see a strong close to FY21 in domestic business even as margin to decline to 23% on lower revenues qoq

* Alembic Pharma US sales likely to be soft and similar to Q3 at ~US$70mn with scope for disappointment if sartans fare worse than expected (based on Jan/Feb US generic data). Margin at 23% would be lowest since Q3 FY19

* Syngene to clock steady growth in revenues; Margin spike of 33% in Q4 last year in absence of expenses therein would result in unfavourable PAT comparison YoY.

* Earnings surprise – Positive surprise can be had in DRRD, IPCA and negative outcome likely in ALPM and LPC

* Notwithstanding Q4 numbers, our top BUYs retained on domestic plays like TRP IN, AJP IN, IPCA IN and ALKEM IN, niche US exposures ALPM IN and unique B2B proposition GLAND IN

OIL & GAS

* The 4QFY21 was marked by higher Crude oil and LNG prices. While Crude Oil (Brent) price on an average improved sequentially to USD 61/bbl (from US$ 45/bbl in 3QFY21); the spot LNG prices averaged higher as well at USD 8.9/mmbtu (3QFY21: ~ USD 7.1/mmbtu)

* Higher crude oil prices augur well for the profitability of upstream companies viz ONGC and Oil India

* The refinery margins also improved during the quarter with Singapore benchmark averaging higher at US$ 1.8/bbl (3QFY21: US$ 1.22/bbl) on improvement in MS, HSD and Jet Kero spreads. Higher refining margins would likely translate into improved profitability for RIL and OMCs

* The domestic pricing environment in petroleum products also saw an uptrend, with petrol and diesel prices being higher by 9% on an average. The same along with higher crude oil prices could result in inventory gains for OMCs

* The LNG import though sluggish in the month of Jan, is estimated to normalize over Feb‐Mar ’21 as LNG prices cooled and demand recovered

* We expect CGD companies to report growth in volumes, while GUJGA would benefit from higher industrial consumption, IGL and MAHGL are likely to report better traction in CNG sales.

CONSUMER STAPLES

* We expect a strong recovery in sales trajectories for the entire staples universe from a low base with demand holding up well in food, health and hygiene categories, helped further by a continued recovery in discretionary categories.

* Rural demand is expected to remain strong this quarter as well which would mean a strong performance from companies which have a well‐entrenched rural distribution network or have focused on building that over the past couple of years.

* Growth is expected to be much higher this time for HPC companies like HUL, Marico and Dabur given a weak base while foods companies like Nestle and Britannia are likely to report marginally lower than historical growth given some cool‐off in demand and a relatively unfavorable base. The only exception would be Tata Consumer which will see strong growth led by sharp tea price hikes.

* Key raw materials like milk powder, palm oil and crude derivates have risen which would pressurize gross margins for most companies while EBITDA margins should still improve given positive operating leverage and a combination of cost efficiencies and lower A&P spends.

* E‐commerce and general trade should continue to be the fastest growing channels for most companies while MT is also expected to see some recovery.

* Our top picks in staples would be Nestle, Tata Consumer, Marico and Emami.

CONSUMER DISCRETIONARY

* On the discretionary side, most companies should get back to positive growth with strong demand recovery momentum continuing since the festive season.

* While the growth in smaller markets seems to have sustained atleast till late March for most companies, metros demand especially in malls remains soft.

* With the second half of March 2020 being a complete write‐off for retailers, the favorable base is expected to help.

* Some categories like jewellery, innerwear, footwear, QSR and paints should continue to see double digit growth for the quarter; apparel retail should turn marginally positive with increasing footfalls while luggage, multiplexes would remain soft.

* We expect the top brands across categories to keep gaining market share form smaller brands and unorganized players who have weak digital capabilities, liquidity and distribution.

* Another key trend across categories would be a stronger growth in value for money/ mass segments and low‐ticket consumption items.

* Margins are likely to remain resilient despite an increase in discretionary spends with some cost saving initiatives continuing to benefit companies. The impact of sharp inflation in cotton yarn and crude based fabrics should not impact gross margins in 4Q given the existing old inventory with most retailers.

* Our top picks in the space would be Jubilant Foods, Page Industries, Relaxo Footwear and V‐Mart.

CONSUMER DURABLES

* The strong demand momentum seen since 2Q is expected to continue for electricals and white goods companies given a combination of price hikes and continuation of strong secondary sales further helped by the early onset of summer.

* Leading brands should continue to see market share gains led by better distribution reach in both direct sales and e‐commerce channels and better product availability.

* Continued premiumization especially in small appliances where products with better features have seen increased penetration given WFH environment.

* Further, given expectation of another round of price hikes in April given the inflation in key inputs in addition to strong demand expectations from the summer season, sales should get supported by strong channel filling in March.  Margins are expected to improve sharply for most players given positive operating leverage and a low base from last year which saw under‐absorption of costs.

* Further localized lockdowns and commodity price movement are the key risks to this otherwise strong growth story for the space.

* Our top picks in the space would be Whirlpool, Voltas, Polycab and Crompton.

FINANCIALS

Q4 FY21 for Banks & NBFCs will be a strong quarter characterized by further normalization of disbursements (loan growth) and collections, and lower‐than‐feared slippages and new delinquencies. Easing funding cost is likely to feed into better NIMs for many of our coverage companies. Though core PPOP performance is estimated to be sturdy for our coverage, the earnings could be suppressed by a prudential provisioning stance (to cover risks from relapse of Covid).

* We expect private banks to deliver sustained brisk growth in retail segment courtesy normalization in growth approach (credit policies), constant strong demand across products and gains of market share (particularly in home loans). CV Finance, Microfinance, LAP and Unsecured Loans (PL, Cards and BL) would witness sequentially stronger traction. Uninterrupted deposits mobilization would keep LDR under check despite stronger loan growth. However, NIMs would be positively influenced by the growth mix. Delinquencies and slippages in retail segment are likely to be lower than Q3 FY21 (our channel checks across retail products corroborate this). Business‐as‐usual credit cost should be lower.

* Non‐MFI SFBs could likely perform better at the earnings level. In our recent interactions, both AU SFB and Equitas exuded confidence about delivering improvement in asset quality. Growth in their vintage segments of vehicle finance and secured BLs has been reviving at a fast clip, and low‐cost deposits accretion remains strong.

* The larger HFCs should report impressive loan growth on the back of surge in housing sales. Among the smaller ones, Can Fin could stand out by exhibiting material loan book accretion in the quarter after having reduced rates to match the competition. Repco is likely to report insipid growth but resilient asset quality.

* Vehicle financing NBFCs should report a strong operational performance aided by sustained growth recovery, firm‐to‐higher NIMs and NPL corrections. After a disappointing Q3, MMFS could report a large swing in profitability due to a sharp reversal in NPLs and provisioning. Chola and SHTF would report a steady performance.

* MFIs are estimated to report incremental growth recovery and a mild improvement in collection efficiency. With PAR 90 exhibiting stickiness and renewed concerns around collections due to restrictions/partial lockdowns being imposed by few states, the larger MFIs could take a conservative provisioning stance which could impact profits.

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