India Inc marching ahead! Here are 7 big takeaways for investors post Q3 results

Market Outlook
ITI | The company reported loss at Rs 31.76 crore in Q3FY21 against profit Rs 168.25 crore in Q3FY20, revenue fell to Rs 496.88 crore from Rs 827.95 crore YoY.

ITI | The company reported loss at Rs 31.76 crore in Q3FY21 against profit Rs 168.25 crore in Q3FY20, revenue fell to Rs 496.88 crore from Rs 827.95 crore YoY.

After a steady September quarter, December quarter results cemented hopes of a broad-based recovery in the earnings trajectory of India Inc.

A sharp demand recovery, opening up of the economy, reduced number of COVID-19 cases and cost-saving initiatives by companies were the key reasons for earnings beats and upgrades, according to brokerage reports.

PAT (Profit after tax) growth of domestically-oriented sectors (aggregate ex-financials, commodities, IT & Pharma) jumped to 22% YoY in Q3 from 47% YoY in the previous quarter.

Nifty50 companies’ EBITDA (earnings before interest, taxes, depreciation, and amortization) margin expanded by 295bp YoY in Q3 on the back of lower overhead and raw material prices, led by metals, materials, healthcare, and auto sectors.

Among Nifty50 companies, Tata Steel, ICICI Bank, and Reliance Industries were major contributors to PAT growth while ONGC, Axis Bank, and IndusInd Bank dragged the overall PAT growth number.

“Corporate earnings were driven by cyclicals and characterised by strong demand improvement, coupled with cost optimisation. Earnings growth and upgrades have been broad-based as all mainstream sectors have beaten consensus expectations,” Jitendra Arora, Executive Vice President & Senior Equity Fund Manager – Investments, ICICI Prudential Life Insurance Company told Moneycontrol.

“We believe the government’s focus on fiscal expansion and capex augurs well for the revival of the long-anticipated private investment cycle. If the government policies like fiscal expansion, PLI schemes succeed in catalysing private capex, we expect the earnings momentum to sustain with a further revival in the economy, the containment of the COVID-19 pandemic, and the benefit of a low base ahead,” he said.

Sectorally, autos, capital goods, cement, consumer, consumer durables, private and PSU banks, healthcare, metals, oil & gas, retail and technology reported beats on 3QFY21 PAT estimates. NBFC, staffing and utilities reported in-line earnings.

Here are 7 key takeaways as listed by various brokerages for investors from the December quarter earnings:

Nifty Performance in December quarter:

As many as 30 Nifty companies reported beats on PAT estimates. Metals, O&G, Autos, and Technology led the incremental profit growth for Nifty companies, said a Motilal Oswal report. 16 Nifty companies saw earnings upgrades of greater than 5% for FY22 EPS, while 3 companies saw downgrades of greater than 5%.

JSW Steel, BPCL, Sun Pharma, Cipla, IOC, UltraTech Cement, Hindalco, Tata Motors, Grasim, M&M, Asian Paints, Power Grid, Bajaj Auto, Hero, HDFC, and Wipro have beaten our estimates, reporting PAT growth of over 20 percent on a YoY basis, the report added.

Nifty EPS Growth in FY21/FY22:

Earnings upgrade continued in Nifty led by solid beat and upbeat commentaries. The Nifty FY21/FY22 EPS has been upgraded by 19%/11% since Oct’20, according to a Motilal Oswal report.

“We expect Nifty EPS to grow 15.7% in FY21E, driven by a) Better-than-expected economic growth and quicker pace of normalization b) cost rationalization measures c) lower-than-expected asset quality stress in major banks and d) recovery in cyclical sectors with underlying strong commodity prices. Financials, Metals, Technology, and Autos are expected to drive incremental profits in FY22,” added the report.

Elara Securities raised their Nifty50 EPS to Rs 726, up 10.6%, for FY22E and Rs 838 for FY23E, up 10.5 percent, from the last quarter. Currently, the brokerage firm expects 39.6 percent EPS growth in FY22E and 15 percent EPS growth in FY23E, hinging on EPS expansion in consumer discretionary, financials, and energy.

Nifty valuations & Target:

After the recent rally which drove Nifty50 above 15,000 in February – experts feel that the valuations are still inexpensive and the target could be in the range of 16,000-16,300 levels.

“Nifty valuations at 21.3x FY22 EPS are not inexpensive anymore and demand consistent earnings delivery ahead. Rising bond yields may cap equity valuations as the RBI may have to do a balancing act to keep bond yields at lower levels while managing the government borrowing program,” said the Motilal Oswal report.

ICICI Securities has assigned bull market valuations of ~20x P/E, and based on that target for Nifty is at 16,300.

Sales growth accelerates to a six-quarter high:

The earnings momentum gathered pace in 3QFY21, as companies across most sectors reported an acceleration in earnings growth.

Aggregate (ex-financials) sales of BSE500 companies contracted by only 1% YoY in 3QFY21 compared with ~9% YoY contraction in the previous quarter, IIFL Securities said in a report.

“While softer crude oil prices (Brent Crude price averaged at US$ 45/bbl in 3QFY21 compared with US$ 63/bbl in 3QFY20), dragged down the Oil & Gas sector sales growth (~18% YoY contraction in 3QFY21 vs. 25% YoY decline in 2QFY21), this was partly offset by the sharp recovery in the Metals & Mining sector sales growth (~13% YoY in 3QFY21 vs. 6% YoY in 2QFY21), aided by higher metal prices,” said the report.

“The aggregate sales of domestically-oriented companies (aggregate Ex-Financials, Commodities, IT and Pharma) also grew by 6% YoY, after five consecutive quarters of a decline and points to a recovering domestic demand,” added the report.

Interest burden edged down in 3Q:

Interest burden further improved in 3QFY21, due to improving EBITDA growth along with low-interest rates. The aggregate (ex-financials) interest expense, as a proportion of EBITDA, declined to ~11% in 3QFY21 from ~13% last quarter.

“The interest expense burden was low across sectors, barring a few like Industrial Construction (~38% of EBITDA), Retail (~46% of EBITDA) and Travel (~64% of EBITDA),” said the IIFL Securities report.

Upside risks to interest rates could weigh on interest burden:

However, interest rates are under pressure due to the upside risks to inflation and large government borrowings. “While the RBI is taking steps to contain the rise in interest rates, the effect of its efforts, so far, is largely restricted to 10-year sovereign yields. Higher interest costs could raise the interest burden in upcoming quarters,” said the IIFL Securities report.

Profit growth accelerated in 3Q:

The aggregate profits of BSE500 companies accelerated to 46 percent YoY in 3QFY21 from ~15 percent YoY last quarter. While some sectors like Metals & Mining and PSU banks reported an exceptionally strong recovery, the acceleration in earnings growth was fairly broad-based.

PAT growth of domestically-oriented sectors (aggregate ex-financials, commodities, IT & Pharma) jumped to 22% YoY in Q3 from 47% YoY in the previous quarter.

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