The latest result season (3QFY22) has ended on a mixed note. While aggregate numbers look on expected lines, the internals however show a different picture. There is significant divergence in performance of various sectors. In fact, the number of companies that did not meet market expectations is higher than the number of companies beating the expectations. Raw material inflation hurt most of the manufacturing sectors. Lack of pricing power in view of poor demand thus resulted in margin compression for most of the manufacturing sector. Financial sector was the brightest spot with credit demand accelerating, and asset quality, recoveries & profit margins improving. IT Services and Real Estate were other sectors that witnessed better performance on better demand environment. Metals and mining had another great quarter as prices remained elevated, with non-ferrous performing better than the ferrous metals. Oil & Gas sector performance however was below expectation. Though the headline Nifty EPS did not see any noticeable change post results, in broader markets earnings downgrades outnumbered the upgrades.
The most notable features of 3QFY22 results were (i) continued deleveraging of corporate balance sheets; (ii) material decline in rural demand and (iii) significant disappointment by small cap stocks.
Some of the key highlights of 3QFY22 results could be noted as follows:
Nifty EPS
Nifty EPS for FY22E has been reduced by ~1% to INR735 (earlier: INR743) largely due to a 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. (MOFSL)
NIFTY EEPS has seen only minor tweaks in the current quarter with 15.6% EPS CAGR over FY22-24 with FY22/23/24 EPS of Rs691, 807.5 and 924.4. Our estimates are higher by 1.6/0.8/0.3% for FY22/23/24. NIFTY is currently trading at 21.8x 1-year forward EPS which shows 6.3% premium to 10 year average of 20.6x. Past 3 dips show that NIFTY has bottomed out around 10 year average PE except in March 20, when it bottomed out at 23% discount to 10 year average. (Prabhudas Liladhar)
Margins Compression
3QFY22 net profits of the Nifty-50 Index increased 24% yoy versus our expectation of 20% increase and EBITDA of the Nifty-50 Index increased 17.5% yoy versus our expectation of 15.5% increase. All the consumption sectors saw further compression in gross and EBITDA margins due to continued high raw material prices and limited ability of companies to raise prices fully. (Kotak Securities)
EBITDA margins (excl financials & commodities) compressed significantly on YoY basis, by 236bps. Major compression was seen in Paints (753bps), Tyres (913bps), Utilities (712bps, mainly from the gas price increase), Pharma (535bps) and Cement (756bps). However, on a sequential basis, significant margin improvement was seen in Chemicals (194bps) and Paints (288bps).
Notable sectors below the 5-yr peak are Travel (by 11pps), Tyres (7ppt), Media (9ppt), Paints (5ppt), and Automobiles (5ppt). Notable companies below 5yr peak are Eicher, Godrej, Welspun, Mahanagar Gas, MRF and Torrent Pharma. As for the EBITDA margin above the 5-yr peak, some notable names are IRCTC, Cyient, TVS, Jubilant FoodWorks, and ACC. (IIFL Securities)
Upgrade vs Downgrade
The biggest downgrades happened in Cement and Tyres (7ppst each), Financial services (6ppt) and Business services (5ppt). Some notable companies with the biggest downgrades are MRF, Whirlpool, Dalmia Bharat, JK Cement, Lupin and Dixon. The highest upgrades were seen in Paints, Real Estate, Telecom and Discretionary − all in the 2-3% range. Some notable companies with the highest upgrades are Blue Dart, Canara Bank, SRF, and Titan. (IIFL Securities)
Deleveraging
Aggregate interest/Ebitda is broadly stable, at 10% levels, led by both, improved Ebitda and cash flows, down from 24% in the Mar-2020 quarter. Significant deleveraging during the pandemic, coupled with low interest rates, has helped in reducing the interest burden on companies. On an aggregate level, interest costs are down by 8% on a 2Y CAGR basis. Going forward, though, interest rates may rise again on the back of acceleration in credit. The current corporate bond yields have cut the gap to their prepandemic levels to some extent and central banks across the globe too are looking at rate hikes, to initiate normalisation. (IIFL Securities)
Rural Demand
Recent commentaries by several corporates indicate to slowdown in rural demand. The slowdown has been observed in select FMCG categories, 2 Wheelers, cement and post Diwali durables demand has also been tepid. Rural slowdown has many reasons- Rural slowdown has been triggered by 1) higher increase in the cost of Agri inputs than the outputs potentially impacting farm incomes which are roughly 30% of rural income 2) Poor spatial distribution of monsoons 3) Lower remittances from urban workers to their families as labor is yet to fully migrate to cities for work 4) High Inflation in essential commodities like fuel, edible oil, tea and other daily essentials due to global disruption in supply chains. However we believe bumper wheat harvest and rising job/work opportunities led by Infra development, housing, artisans, carpenters, painters, truck drivers, factory workers etc. will boost income and demand. However given high inflation the earliest a rural seems likely is from the middle of 1Q23, with 4Q demand being also under pressure. (Prabhudas Liladhar)
Key sector trends
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.
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.
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.
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.
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.
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. (MOFSL)
Conclusion
Overall 3QFY22 earnings were encouraging, given the context of inflationary pressures, tightening liquidity, supply chain bottlenecks, adverse weather conditions; fiscal constraints impacting cash payouts in rural areas and fresh Covid breakout.
The management commentary post earnings have been mostly optimistic; though some companies have raised concerns over consumer demand. So far most analysts appear to be sticking with their FY23 earnings estimates. The geopolitical concerns, energy prices and impact of interest rate hikes on global commodity inflation are some of the key variables to be watched in the next 3-4 months. Most important among these would be easing of global inflation without hurting the growth materially.
