Corporate earnings growth is likely to accelerate in the last quarter of FY21, but resurgence of Covid cases could cloud the outlook for FY22
As India Inc's January-March quarter results for FY21 trickle in, early birds bring good tidings of robust earnings momentum. Companies look set for a strong show in Q4 on a low base in the previous fiscal. However, the recent surge in infections and sporadic curbs by states could prove to be a dampener for the earnings story in FY22.
IT bellwether Tata Consultancy Services (TCS) kicked off the fourth-quarter earnings season on April 12 with a 14.9 per cent year-on-year growth in consolidated net profit and a 9.4 per cent increase in topline. Infosys and Wipro followed with double-digit growths in consolidated profits at 17.5 per cent and 27.7 per cent, respectively, and 13.1 per cent and 3.4 per cent increase in revenues. These numbers could be the harbinger of a healthy earnings season in a year ravaged by the pandemic.
Analysts believe the base effect due to a sudden lockdown in March '20 and cyclical sectors such as metals, banks and cements would lead the earnings acceleration. "Q4FY21 is expected to be a stellar quarter representing the continuation of a sequential recovery, driven by a gradual economic re-opening and robust demand reflecting a strong pick-up in cyclical sectors. The positive earnings momentum of the last two quarters is likely to sustain in Q4, led by a sharp demand revival across segments. This is further supported by the lower base of last year," says Neeraj Chadawar, Head, Quantitative Equity Research, Axis Securities.
Sanjeev Prasad, Co-head, Institutional Equities, Kotak Institutional Equities expects net profits of BSE-30 companies to increase 55 per cent y-o-y and 6 per cent quarter-on-quarter (q-o-q) and for the Nifty 50 ones to increase 125 per cent y-o-y and 8 per cent q-o-q. "BPCL, IOC and Tata Motors - which had reported huge losses in Q4FY20 - are not a part of the 30-scrip Sensex, while they are very much part of the Nifty 50, accounting for the large divergence in performance of the Sensex and the Nifty," he adds.
With the gradual easing of lockdown restrictions coupled with diminishing supply side constraints, net sales of Nifty 50 companies and Nifty 500 recorded the first y-o-y expansion in the post-pandemic period, registering a 0.9 per cent and 3 per cent growth each in the December quarter. Improved consumption during the festival season and aggressive cost-cutting measures undertaken by companies also boosted profits at the operating level - it grew by 17.1 per cent and 19.2 per cent y-o-y, respectively, for Nifty 50 and Nifty 500 companies (excluding financing costs).
FY21 is likely to end with a bang, aided by an uptick in global and domestic macroeconomic activity. "Fiscal year 2020/21 is expected to end with a healthy 13 per cent earnings per share (EPS) growth for the Nifty, the highest in last six years," says Gautam Duggad, Head of Research, Motilal Oswal Institutional Equities. The recent surge in Covid cases is unlikely to impact Q4FY21 estimates, even as it poses risks for FY22 earnings delivery.
Likewise, an Edelweiss Research report pegs a 21 per cent earnings growth in FY21 for Nifty companies, the highest in a decade. This is owing to global reflation (expansion in the level of output of an economy by government stimulus, using either fiscal or monetary policy), cost rationalisation measures by corporates, and market share gains from the unorganised sector. Going ahead, the resurgence in Covid cases (in India and globally) and potentially higher interest rates pose a risk to FY22 earnings outlook, it added.
Metals: According to Axis Securities' Chadawar, "Profits of the metals sector are expected to more than double in Q4FY21 due to demand surge. Furthermore, operating performance is likely to be strong, driven by demand and higher metal prices." The metals and mining space is expected to register a 26 per cent growth in revenues, while EBITDA is pegged to increase by 109 per cent, on a yearly basis.
Specialty chemical & Auto: Specialty chemical companies are expected to report a 40 per cent growth in bottomline numbers on the back of a strong outlook for the industry at large. However, margins are likely to be hit by higher input costs and supply-side issues led by a shortage of shipping containers, adds Chadawar. In the automobile space, demand will remain strong during the quarter led by sequential economic recovery, continued preference for personal mobility, and rural push. "EBITDA margins are likely to be lower sequentially due to raw material cost headwinds. Commodity cost pressure is likely to be higher, leading to pressure on margins in Q4," he adds.
IT: Strong deal wins, continued traction in digital and Cloud augurs well for Indian IT companies. "We expect companies in our coverage universe to further accelerate y-o-y revenue growth momentum on broad-based demand, strong deal wins, ramp-up of large deals and demand recovery in highly impacted verticals. Revenues of Tier-I IT companies are likely to grow by 2.2-3.9 per cent q-o-q in constant currency (CC) terms. Cross-currency movement is likely to aid US dollar revenue by 80-110 basis points in Q4 for Tier-II companies. These companies are likely to report slightly better sequential growth numbers of 2.5-4.5 per cent q-o-q in CC terms on the back of healthy deal wins and a strong pipeline, client mining, and consistent execution," says Dipesh Mehta, Analyst, Emkay Global Financial services.
Margins, however, may take a hit sequentially due to salary hikes, bonuses and a strong rupee.
FMCG: Consumption shift in key categories from the unorganised to the organised sector led to encouraging outcomes in the past two quarters. "We believe the growth momentum has continued in Q4FY21 as well. Low base due to lockdown in March 2020 has further aided growth. Our coverage universe is expected to witness a 20.2 per cent revenue growth on account of sales decline of 7-15 per cent in the base quarter," says an ICICI Direct Research report. Packaged foods, edible oil, immunity boosting product are likely to continue the growth momentum in Q4. Discretionary categories like cosmetics and juices will also witness strong growth due to pent-up demand.
Banks: Banks' net profits are likely to double in Q4, led by lesser provisioning due to the pandemic. "Q4FY21 will be the first quarter of actual reporting of NPAs after the Supreme Court standstill ended. This will provide better clarity on the asset quality front," says Axis Securities' Chadawar. Slippages are expected to be higher during Q4FY21, with an improved asset quality outlook in FY22 and FY23. Margins, however, may take a hit sequentially due to salary hikes, bonuses and a strong rupee.
As of now, management commentaries will set the tone for the current fiscal. Going ahead, Duggad believes the interplay of resurgence in Covid cases and the pace of vaccination would decide the trajectory of recovery.