Positive Q4 Results

The rising number of corona virus cases and earnings are the factors that may decide the market direction going forward. While the positive results have so far kept market momentum intact, the increasing spread of the second wave of the virus threatens to dislodge the positivity in the markets. Yogesh Supekar analyses the Q4 results while highlighting the hits and misses of the current earnings season while the DSIJ Research Team highlights the sector-wise earnings’ performance this season 

Election results and increasing number of corona virus cases are expected to set the tone for the markets in the near term along with the quality of earnings this season. Indeed, the way the markets have behaved both locally and in the developed world has got investors spellbound. The earnings in the US markets have been more than impressive with stocks such as Amazon, Tesla, Facebook and Google continuing to report above average growth. The US economy is expected to deliver more than 7 per cent GDP growth in FY22 while the recovery in European economies stands to be impressive, especially that of the UK. Chinese economy has also rebounded impressively enough to create optimism and allow the equity prices to remain in the green.

The Indian economy is also expected to deliver higher than 10 per cent GDP growth in FY22, thus giving hopes to long-term investors. While low interest rates, expected economic rebound globally, record GST collection, heightened economic activity in March 2021 are the factors helping the risk on mode to be active, in reality true optimism is infused by superior earnings this season as well. On the earnings front, after two stupendous back-to-back earnings’ seasons, the analyst community was not very excited about the prospects this season. However, the quality of the earnings has been more than satisfactory this season, so far.

If we talk about the Sensex companies that have declared their results till now, only HCL Technologies has been a disappointment. RIL, HUL, Titan, Axis Bank, Bajaj Finance, Bajaj Finserv, ICICI Bank, Maruti Suzuki and Tech Mahindra were able to declare positive results this season. The results of Maruti Suzuki are a reflection of what is happening on the ground. The revenues increased for the automaker indicating that there is latent demand for the products. However, the EBITDA margins decreased, underlying the fact that the rising commodity prices have started to hurt profit margins for automakers. Indeed, the rise in commodity prices is something that has caught manufacturers off-guard.

However, the alarm button is not being pressed yet as the demand situation is healthy and there is increasing demand even at higher prices for the products. Experts believe that there is nothing to worry about as far as the demand scenario is intact. They fear a situation when there is a drop in demand due to multiple regional lockdowns that threatens to disrupt the supply chain of manufacturers and automakers, forcing manufacturers from various industries to struggle to maintain reasonable margins. Such a situation may destroy wealth in the near to medium term.

Ultratech Cement was one of the star performers amongst the Sensex constituents that managed to impress with its Q4 results this season. In the cement space, Dalmia Bharat remained one of the top performers this season with outstanding results. Gujarat Ambuja Cement and ACC Limited were amongst the cement manufacturers that impressed with the Q4 results this season. In the pharmaceutical space, Laurus Labs stood out as one of the best performers, continuing its growth trajectory from the previous two seasons. Ajanta Pharmaceuticals and Syngene International are amongst those pharmaceutical companies to have declared positive results this season.

UTI AMC and ICICI Securities in the financial space managed to impress with their earnings while Rain Industries, Sundaram Clayton and KPR Mills managed to deliver a superior performance during this period. In the small-cap space, some of the impressive performances came from Kirloskar Pneumatic, Tata Coffee, Mastek, Swaraj Engines, Tinplate Company, KSB Pumps, Gateway Distripaks, Schaeffler India, National Standard, India Bulls Real Estate and Filatex India.

INTERVIEW

"The Indian Economy Will Continue To Be Resilient In FY22"

Despite the second wave of the corona virus resulting in localised lockdowns across the country and creating an economic setback for businesses, Niraj Kumar, Chief Investment Officer, Future Generali India Life Insurance Co. Ltd., is quite optimistic about the overall scenario

How has the earnings’ season been so far? What are the hits and misses this season?

The onset of the earnings’ season has seen some encouraging trends with cyclical sectors such as large banks and financials, IT, cement, metals, etc. posting a strong show, while sectors such as automotive, consumer durables and FMCG have reported margin compression owing to elevated commodity prices, largely in line with expectations. The major disappointment so far has stemmed from the small and mid-sized financials, which adds credence to our stance that large financials with well-capitalized balance-sheet and strong franchisee will continue to gain at the expense of small and mid-sized regional financials.

But the key silver lining in this season is that despite the situation being fluid due to the pandemic in the quarter and year ahead, there has been one consensus amongst most companies across sectors – that the impact of lockdown this year would be manageable and not as grave as last year. Most of the industries and the entire supply chain are far better equipped to handle the disruptions this time, thanks to the learnings from the lockdown in March 20. 

What is your outlook on the markets for 2021? What are the key risks for markets in your view?

Clearly, against the backdrop of after having staged a heroic recovery in FY21 with markets delivering an astounding ~70 per cent returns in FY21, the markets are bound to take some breather and see consolidation in FY 2022. While the incumbent second wave situation is quite grim in India, we reckon the impact to be transient and will not derail the pace of economic recovery as the rampant vaccination process picks up and will be the key barometer for the economy and markets.

The markets at this juncture are witnessing bouts of volatility, as on one side they are posed with risks looming from the second wave and localised lockdowns, while on the flip side they are juxtaposed with excellent performance posted by corporates across sectors in the current earnings’ season with the growth outlook not so bleak.

As testified in the first wave, we believe that the Indian economy will continue to be resilient in FY22, posting an economic rebound despite the short-term risks from the second wave. India is on the cusp of a virtuous economic growth cycle, which will culminate into stronger momentum of earnings’ recovery and aid the markets to perform reasonably well. Thus we believe any corrections in the markets should be leveraged as an opportunity to buy and create long-term wealth.

SECTORAL ANALYSIS

Pharmaceutical

The Q4 results of FY21 for the pharmaceutical sector companies have been attractive. Considering the key players in this sector, in the fourth quarter of FY21, Divis Laboratories posted a strong increase in net sales of 21.86 per cent whereas Alkem Laboratories recorded an increase of 6.24 per cent in net sales. On the other hand, Glenmark Pharmaceuticals reported an increase of 4.55 per cent and Cadila Healthcare registered a rise of 4.51 per cent in net sales. While Divis Laboratories posted an increase in operating profit by 32.67 per cent, Alkem Laboratories recorded operating profit with an increase of 30.01 per cent. Cadila Healthcare and Glenmark Pharmaceuticals posted a rise in operating profit of 16.23 per cent and 15.25 per cent, respectively.

The greatest rise in net profit was clocked by Cadila Healthcare which was 40.64 per cent followed by Divis Laboratories which registered a gain of 31.06 per cent and Glenmark Pharmaceuticals and Alkem Laboratories which recorded rise in net profit by 30.05 per cent and 18.06 per cent respectively. It is expected that the pharmaceutical sector will remain a hotspot for investors this year as well. The domestic market has already witnessed a huge rally across pharmaceutical sector stocks, but considering the crucial health crisis the country is in, a huge demand can be sensed for medicines and health-related products and infrastructure. Moreover, faster approvals are expected to be obtained for new drugs, foreign partnerships, etc.

Cement

The fourth quarter of the fiscal year is usually the best quarter for cement companies and given the robust YoY volume growth expected due to low base of Q4FY20, this quarter is expected to be no different. Demand across various segments like rural housing, affordable housing and infrastructure was buoyant during the quarter and most cement companies operated at full clinker utilisations across the northern, central and western regions, thereby providing operating leverage. The southern region reported positive demand growth after reporting contraction for a long time.

Only the western region’s demand was lower as infrastructure activities in both Gujarat and Maharashtra were lower. During the quarter, some input cost like diesel, crude and pet coke increased by 9, 37 and 29 per cent QoQ, respectively. Given this price increase, the EBITDA per metric ton is likely to decline; however, with robust YoY increase in volume, absolute EBITDA is expected to increase. Among the companies that have reported their results, ACC has reported 22.73 per cent growth in revenue to Rs 4,213.28 crore in Q1CY21.

The company reported 40.75 per cent growth in operating profit and 73.99 per cent growth in the bottom line. Companies like ACC which have increased capacity in the last 6-12 months are likely to put up a strong show as well. These include names such as Shree Cement, Dalmia Bharat and JK Cement. With rising corona virus cases and lockdowns announced in various pockets of the country, we expect some dent in the demand environment. While the impact will not be as pronounced as felt earlier, this is definitely a cause for concern for demand recovery in FY22. 

Information Technology

In Q4FY21, on a consolidated basis, the revenue of TCS stood at Rs 43,705 crore, registering an increase of 9.4 per cent as against Q4FY20. The operating margin stood at 26.8 per cent with an expansion of 171 bps against its corresponding quarter last year. The PAT stood at Rs 9,282 crore, which grew by 14.7 per cent YoY. The PAT margin witnessed a rise of 98 bps from 20.26 per cent in Q4FY20 to 21.24 per cent in Q4FY21. Infosys’ revenue grew 13.08 per cent to Rs 26,311 crore YoY and 1.5 per cent QoQ. The revenues in constant currency terms grew by 9.6 per cent YoY and 2 per cent QoQ. The operating margin stood at 24.5 per cent, an increase of 3.4 per cent YoY and a decline of 0.9 per cent QoQ.

It posted a 17.1 per cent per cent YoY rise in net profit at Rs 5,078 crore. On a QoQ basis, the net profit slipped by 2.62 per cent. For FY22, Infosys forecasts revenue growth guidance of 12-14 per cent in constant currency terms while it posted operating margin guidance of 22-24 per cent. HCL Technologies’ revenue from operations went up 5.7 per cent YoY at Rs 19,641 crore and was up 1.8 per cent on QoQ basis. It reported 72 per cent decline in profit in Q4FY21 on QoQ basis led by higher tax expense during the quarter. The company forecasts revenue to grow in double digits in constant currency for FY22. The operating profit margin or EBIT margin is expected to be between 19-21 per cent for FY22.

Real Estate

The year 2021 had begun on a positive note with the easing of restrictions and start of the vaccination drive across the country. For real estate companies, the key highlights will be continued robust residential sales volume growth led by factors such as pent-up demand, benign interest rates and measures such as a cut in stamp duty in Maharashtra. The real estate companies are expected to post good numbers in Q4FY21 with some of the companies already having their results announced. Indiabulls Real Estate Limited posted revenue growth of 529 per cent YoY in Q4FY21 and stood at Rs 759.5 crore.

The EBIDTA of the company improved significantly from a loss of Rs 56.25 crore in Q4FY20 to a profit of Rs 173.19 crore. Further, the company registered net profit of Rs 94.5 crore as against loss of Rs 109.70 crore during the same period. Sobha Limited also reported record sales booking of Rs 1,072 crore during the last quarter of fiscal year 2020-21. This was an increase over sales booking of Rs 695 crore a year ago. In volumes term, the company’s sales volume was up 48 per cent YoY in Q4FY21 at 1.34 million square feet. This was the best ever quarter of the company on all the operational parameters till now. Going forward, experts say that the pent-up demand due to the multiplier effect of policy reforms will fuel sustainable growth in 2021. Demand for owned houses has gained traction post the pandemic and adaptation of digitization, product redesigning and upskilling of human capital will be focal points for the business continuity plans. The commercial real estate growth trajectory will be resumed once the GDP growth is on a positive scale.

Banking



For the banking sector, Q4FY21 is mostly a normalised quarter with the performance mirroring the previous quarter on business parameters. The quarter will also count in impact of events like the Supreme Court ruling out moratorium extension, waiver of interest and standstill norms, thus giving a realistic reflection of lender’s performance. Slippages is a key point to look for in the results’ season since it is expected to be quite elevated owing to Q4FY21 being the first quarter of bad loan recognition with the Supreme Court lifting curbs on the same. For Axis Bank, net interest income (NII) increased by 11 per cent to Rs 7,555 crore in Q4FY21 compared to Rs 6,807.7 crore in Q4FY20. Its net interest margin expanded 1 basis point YoY to 3.56 per cent at the end of March 2021.

While slippages from the loan book were at Rs 5,038 crore and that from investment exposures stood at Rs 247 crore, gross slippages in Q4FY21 were of Rs 5,285 crore, lower compared to Rs 7,993 crore during Q3FY21. Assessing the asset quality, GNPA increased to 3.70 per cent as of March 2021 from 3.44 per cent in the December quarter. Net NPA also rose to 1.05 per cent from 0.75 per cent in the same period. While results of the banking sector are considered to be a mix of hits and misses, strong performance reported by ICICI Bank for Q4FY21 led by benign slippages, strong growth in retail loans and sharp spike in earnings resulted in boosting investors’ sentiments. While its net interest income (NII) grew by 16.9 per cent to Rs 10,431.13 crore in Q4FY21 compared to Rs 8,926.9 crore in Q4FY20, advances were calculated at Rs 7.33 lakh crore as of March 2021, which is a rise by 14 per cent YoY. The retail loan portfolio registered a growth of 20 per cent YoY. The NPA ratio declined to 1.14 per cent as of March 2021 from 1.26 per cent in December 2020.

In the list of private banks, HDFC Bank reported a jump in net profit for Q4FY21 but failed to beat the market estimates. As for public sector banks, in the case of Bank of Maharashtra the net profit rose by nearly three times in Q4FY21 at Rs 165 compared to Rs 57 crore in Q4FY20 owing to the rise in net interest income and recovery from written-off accounts which more than offset the additional provision of Rs 508 crore to cover the pandemicrelated risks. Despite a strong performance season until now, going forward a threat that looms over the banking sector is the resurgence in the pandemic and partial lockdowns which may create delayed recovery in credit off-take. And hence, healthy provisions created as a buffer and growth outlook put forth by the management will be the key parameters.

Krishnan ASV
Institutional Research Analyst, HDFC Securities.

Banks: Sector Credit Trends

Banks’ non-food credit growth hit a 45-month low of 4.9% YoY in Mar’21, due to a reduction in service credit growth, partly offset by growth in agriculture and personal loans. Industry credit off take remains elusive (0.4% YoY), as large industries segment continues to de-grow (-0.8% YoY). While the second wave of pandemic may cause short-term disruption in credit off take, we expect recovery in credit growth over the medium term for our coverage universe.

Automotive



The March quarter automotive sector earnings have so far beaten street expectations led by the top automobile companies delivering robust performances. The triggers have been the promotional offers, pent-up demand and a rise in preference for personal mobility. Major Indian automobile companies like Maruti Suzuki, Bajaj Auto and TVS Motors have reported YoY growth in net sales of 33.59 per cent, 27.26 per cent and 49.39 per cent, respectively. Between January and March, unit sales of Maruti Suzuki jumped 27.8 per cent to 4,92,235 majorly due to a stronger preference for personal vehicles instead of public or shared mobility.

In the two-wheeler segment, TVS Motors and Bajaj Auto reported 47 per cent and 18 per cent pick-up in volume at 9,28,000, and 11,69,664 units, respectively, in Q4 driven by resilient rural and pent-up demand. Bajaj Auto and TVS Motors have reported YoY growth in PAT of 10.36 per cent and 274.11 per cent, respectively, while Maruti Suzuki reported decline in PAT by 8.74 per cent. From a broader perspective, rural and semi-urban demand remained robust supported by the full-fledged opening of the economy, better cash flows, and financial offers that ultimately drove strong demand for two-wheelers and entry-level cars during the last three months.

Benjamin Graham
Security Analysis: Principles and Technique

"Security analysis does not assume that a past average will be repeated, but only that it supplies a rough index to what may be expected of the future. A trend, however, cannot be used as a rough index; it represents a definite prediction of either better or poorer results, and it must be either right or wrong."

Conclusion

The outlook on the US markets is extremely positive owing to the first quarter’s earnings’ reports. With several major companies beating the earnings estimate this season, the US’ indices are trading close to their all-time highs. The earnings’ season in India has been impressive but not as impressive as the earnings’ season has been for the US companies. The positive narrative on the US economy, powerful vaccination drive, low interest rate environment, high government spending implementing the expansionary fiscal policy and quality earnings beating the market estimates is pushing the US markets to all-time highs. 

FPIs have been net sellers in Indian markets for the first time after six months. The reason is not difficult to ascertain. Investors are spooked by the increasing spread of the corona virus cases in India. ‘Sell in May and go away’ could be a reality in the Indian markets if the investors are convinced on the situation not being under control on the viral front. The threat of lockdown is eminent and the slowdown in economic activity is what is bothering the markets at these levels. The markets have not factored in the second wave of the pandemic and its impact on economic activity yet, and hence there could be some price correction. Quality earnings and positive earnings’ report by several companies is what is supporting the markets from falling owing to the pandemic-led disturbances.

However, experts are now questioning how far would earnings alone support the market at the current levels. Also, it is not like the earnings’ growth is over the roof as is the case in the US’ markets. Even as the Indian diaspora struggles to support those gasping for air, the markets can be expected to show some correction despite healthy earnings’ season in the near term. Inflation has also returned to haunt stock traders in the current earnings’ seasons. There are visible headwinds and there is every chance that the market may punish those companies that do not reflect strong earnings. At this point of time, investors can play safe and invest in those stocks that have shown extremely positive results this season and have also shared a positive outlook for the coming quarters. Defensive stocks with good earnings’ growth can be banked on at this point of time.