Q3 Results : The New Dawn
The equity market has once again started gaining new highs. One of the reasons for such a stupendous performance is better-than-expected earnings' growth of corporate India. The article highlights the performances of various sectors and outlines the reasons for this impressive recovery
If stock prices are the slaves of earnings’ growth, then at this point the master is ordering and the slave is obediently carrying out the commands. After showing a minor correction in the last week of January, the equity market has once again started gaining new highs. Benchmark equity indices such as Nifty and Sensex have crossed the psychological level of 15,000 and 51,000, respectively. Other sectoral as well as broader equity indices are also showing a rise in respective indices. The following graph shows the performance of some of these indices year-till-date as on February 5, reflecting the earnings from these sectors.
One of the reasons for such a stupendous performance is better-than-expected earnings’ growth of corporate India. It will be the second such consecutive quarter when we will be witnessing earnings of India Inc. getting upgraded. To put things in perspective, it has come almost after six years of continuous downgrades. To give you a sense of the quantum of outperformance, the top five listed Indian companies in India by quarterly profit have beaten the consensus estimates by a huge margin. For example, at the start of Q3FY21 it was estimated that Reliance Industries, India’s largest company by profit, will post net profit of Rs 9,940 crore while the actual profit came in at Rs 14,819 crore. Other companies like TCS and Infosys have also exceeded the street estimates in terms of profit.
Tata Motors, which was not doing well earlier, has also sprung a surprise. It reported a profit of Rs 3,222 crore in Q3FY21 against the expectation of Rs 1,428 crore. All this clearly shows how the earnings’ growths of companies are being re-rated. These upgrades have clearly reinforced the word ‘recovery’. A couple of quarters back, market participants were speculating about the shape of the recovery such as ‘U’, ‘L’, ‘V’, etc., but now it collectively agreed that it has been a V-shaped recovery. The best part is that even the management commentaries have been encouraging.
IT companies, for example, have revised their revenue guidance upward. The management commentary even from the banking sector shows that the demand for restructuring has been much lower than expected. The best example of this is State Bank of India (SBI), India’s largest company by asset size, which saw 14 per cent rise in net profit sequentially due to better retail loan growth and better asset quality. Post its results, the shares of SBI extended gains to a record high after its quarterly profit beat analysts’ expectations. SBI stock price has shot up by as much as 15 per cent to Rs 408 in early trade with many brokerages increasing their target price on the stock.
Apart from banking and finance, as of February 5, 2021, 24 Nifty companies have announced their results. On a YoY basis, there has been a marginal rise in sales of 14 per cent. One sector that clearly stands out in its performance is automotive. Companies such as Hero MotoCorp, Bajaj Auto and Maruti Suzuki India have posted revenue growth in double digits. Even on a sequential basis, we see automotive companies posting double-digit growth while a company like Tata Motors has posted 41 per cent jump in sales. The oil and gas sector continues to lag behind and companies like Reliance Industries and Indian Oil Corporation posted a subdued performance.
At the operating level, companies posted double-digit growth on both sequential as well as on yearly basis. Sectors like metal and automotive were the main contributors to such growth. JSW Steel saw its operating profit growing by 33 per cent and 136 per cent on quarterly and yearly basis, respectively. Automotive companies like Tata Motors and Bajaj Auto saw a substantial jump in their operating profit, both on sequential as well as yearly basis. The EBITDA margins on an average have improved on a yearly basis due to cost-cutting by companies. The fall in margins on a quarterly basis was primarily due to poor performance of Dr. Reddys Laboratories, which pulled the overall performance downwards.
The company’s Q3FY21 performance was below expectations, weighed by moderation in its North America pharmaceutical services and active ingredients’ segments and increased operating expenses toward sales and promotion activities for the branded generics segment. Excluding Dr. Reddys Laboratories’ results, the operating profit margin would have remained flat. The net profit of these companies also saw a good jump. On a yearly basis it increased by 20.65 per cent whereas on a quarterly basis it saw a gain of 17 per cent. If we exclude Bharti Airtel’s loss posted in Q3FY21, we see profit increasing by more than 30 per cent both on sequential as well as yearly basis. Following is the list of companies with actual profits and their expected consensus profit for Q3FY21.
The broader sentiment has changed now due to vaccine rollout and continuous decline in number of active cases in India. It has been further aided by pick-up in both global and domestic macroeconomic activity that has helped the demand growth going ahead. Therefore, we may see a continuation of better performance by corporate India. The only caveat to this is inflation rearing its ugly head sooner than later and monetary action remaining behind the curve.
Automotive Sector
The automotive sector’s December quarter earnings have so far beaten street expectations, led by the top automobile manufacturing companies. They delivered robust performances, led by festive push, pent-up demand and rise in preference for personal mobility. Major Indian automobile companies like Maruti Suzuki, Bajaj Auto, Hero MotoCorp and TVS Motors have reported YoY growth in net sales of 13.15 per cent, 17.4 per cent, 38.9 per cent and 27.88 per cent, respectively. Between October and December 2020, unit sales of Maruti Suzuki jumped by 13.4 per cent to 4,95,897 units majorly due to a stronger preference for personal vehicles instead of public or shared mobility.
In the two-wheeler segment, Hero MotoCorp and Bajaj Auto reported 19.8 per cent and 8.7 per cent pick-up in volume at 18,45,274, and 13,06,810 units, respectively, in Q3FY21 driven by resilient rural demand and festive sales. Companies like Maruti Suzuki, Bajaj Auto, Hero MotoCorp and TVS Motors have reported YoY growth in PAT of 23.48 per cent, 23.29 per cent, 28.15 per cent and 85.53 per cent, respectively. From a broader perspective, rural and semi-urban demand remained robust supported by higher the kharif crop, better cash flows and festive season that ultimately drove strong demand for tractors, two-wheelers and entry-level cars during the last three months of CY20.
Pharmaceutical Sector
The pharmaceutical industry has posted a strong growth trend recently thanks to the pandemic. In fact, pharmaceutical companies thrived during the current tough economic times as the sector witnessed a strong demand to roll out the necessary drugs and vaccines. Many sector leaders reported a substantial growth in net sales for Q3FY21 compared to that in Q3FY20. On a consolidated basis, net sales of Laurus Labs rose by 76 per cent YoY in Q3FY21 to Rs 1,288.42 crore while on QoQ basis its net sales gained by 13.13 per cent. Cipla’s net sales increased 39.67 per cent on YoY basis and 29.10 per cent on QoQ basis.
Other pharmaceutical majors reporting strong net sales growth include Ajanta Pharmaceuticals, Thyrocare Technologies, Solara Active Pharmaceuticals, Dr. Lal Pathlabs, etc.
Supported by a better recovery rate of the corona virus patients and an increased general awareness about the pandemic amongst the public, the buzz in the pharmaceutical sector seems to have cooled down during Q3FY21. Granules India reported a rise in net profit for Q3FY21 by 129.89 per cent on YoY basis but on QoQ basis the net profit declined by 10.28 per cent. Sun Pharmaceutical Industries posted 87.37 per cent increase in net profit on YoY basis for Q3FY21 while on QoQ basis it declined by 1.55 per cent. Lower profits of pharmaceutical companies for Q3FY21 can be attributed towards a weak start in the flu season and overall improvement in the health of individuals. Sector leaders such as Cipla, Dr.Lal Pathlabs, Laurus Labs, Ajanta Pharmaceuticals, etc. reported strong growth in Q3FY21 net profit on YoY basis.
Going ahead, while volume growth in India’s business is expected to be in single digits, new launches and specialty portfolios may push up US’ revenues higher. On the global front, Cipla reported 6 per cent YoY growth in its US’ business to around USD 141 million led by continued expansion in the market share of Albuterol and other products while its overall India business grew by 22 per cent as a result of increased demand-led traction in core business categories. Lupin’s North America sales for Q3FY21 were around Rs 14,424 million, an increase by 4.8 per cent compared to the sales of Rs 13,766 million in Q3FY20. Considered as the sixth-largest company in the Indian pharmaceutical space, Lupin posted a 5.4 per cent YoY increase in its India sales for Q3FY21.
FMCG Sector
India’s FMCG sector is expected to show positive growth in the December quarter of FY21. This is due to boost in demand and sales aided by festivals and improved customer sentiments. Aided by better mobility, people are now tempted to spend money to shop for products other than essential ones. This is reflected in the quarterly results declared by well-known four companies of the FMCG sector. We can see that industry leader HUL is leading in net sales-wise performance with a rise of 20.57 per cent in Q3FY21 as compared to Q3FY20 followed by Marico, Dabur India and Britannia Industries. This growth in sales is aided by good volume growth.
Among the four companies, the highest QoQ volume growth was shown by Dabur India at 18.1 per cent as compared to HUL, Britannia Industries and Marico which also displayed a positive trend in volume growth, albeit at a lower rate. At the operating level, Britannia Industries witnessed best growth at 22.37 per cent on yearly basis. In terms of growth, it was followed by Dabur India, HUL and Marico. Leading the change in net profit list on a yearly basis was Dabur India which posted an increase of 23.7 per cent followed by Britannia Industries, HUL and Marico, all posting positive changes. The Q3 results seem to have a positive impact on the financials of FMCG companies. The FMCG index is also displaying affirmative changes since the declaration of results by various FMCG companies.
Banking Sector
One sector that was clearly supposed to be the most adversely impacted by the pandemic was banking. Nevertheless, with each quarter we see the situation improving and the fear of large deterioration in asset quality is fading. This is especially true for private sector banks. For the quarter ended December 30, 2020, large-sized private sector banks have reported strong profits owing to a revival in business. Banks experienced growth in credit towards consumer durables which was mainly driven by attractive financing offers with low interest rates and pent-up demand.
ICICI Bank reported 19.1 per cent YoY growth in its net profit and 16 per cent YoY increase in its net interest income. The bank reported strong performance in its loan book and growth in retail loan, suggesting strong demand for consumer credit in the market. The bank also recorded an improvement in its asset quality with net NPA at 0.63 per cent in Q3FY21 as compared to 1 per cent in Q2FY21. HDFC Bank recorded 18.1 per cent YoY jump in its net profit and its net interest income witnessed growth of 15.1 per cent YoY. Its focus on deposits helped in maintaining a healthy liquidity coverage ratio of 146 per cent. State Bank of India, India’s largest lender, was able to beat analysts’ expectation.
It recorded a decline of 7 per cent YoY in its net profit due to rise in provisions (43 per cent) on a yearly basis. The bank expects increase of 7 per cent in its loan book as it witnesses growth coming from public sector entities. The incremental outstanding credit (YTD) growth turned positive led by growth in agriculture and allied activities as also retail loans. However, the industry and service segments continue to report negative growth. Despite efforts to push retail credit, various festive offers and fall in interest rates of SCBs, there is a slower pick-up in credit growth.
Information Technology Sector
The IT sector continues to be a pillar of strength for India Inc. and Q3FY21 was no exception. For the quarter ending December 2020, corporate earnings of IT firms have beaten street expectations. This is led by top IT companies delivering robust performances with well-placed improving deal pipelines, upbeat commentary and a healthy outlook. The Indian IT heavyweights have delivered higher margins as compared to global technology companies along with a healthy set of free cash flows. They have gained market share in the highly fragmented global IT services’ sector.
While leading IT players such as TCS, Infosys and Wipro have posted a strong performance in Q3 results, Infosys has outperformed both TCS and Wipro in Q3FY21 on the revenue growth front. Sequential revenue growth in constant currency terms (CC) for Infosys grew at 5.3 per cent versus TCS at 4.1 per cent and Wipro at 3.4 per cent. Upbeat management commentary and a healthy outlook from the IT companies also improved sentiments. The three companies saw upward estimate revisions for FY21 and FY22 earnings for the third quarter in a row.
Furthermore, on the operational front, Indian IT companies have seen a sequential expansion in the EBIT margin in the latest quarter of around 10-300 bps. There has been a sharp improvement in operational efficiency parameters such as an increase in utilisation, offshoring and automation and these have been the key drivers for margin growth in Q3FY21. The pandemic has turned from headwind to tailwind for Indian IT companies. Going ahead, as businesses world over prioritize the digital journey and spend on clouds, security, etc., India’s top-notch IT businesses should be well-placed to capitalise on this shift.