1QFY22: Another Medal Like Performance

1QFY22: Another Medal Like Performance

As always, the earnings’ season keeps market participants busy as the information that matters the most is shared by the management of listed companies on a quarterly basis. It is also important because it sets the tone for market direction and helps investors understand the ground realities in the listed space. Yogesh Supekar takes stock of earnings in 1QFY22 and deciphers the trend this season



The earnings season this time around is under the microscope. The reason is that it is being compared with the earnings of 1QFY21 which was marred on account of the national lockdown. And this examination has revealed that the results of the corporate sector across several verticals have not been as negatively impacted as they were during the first national lockdown. The conclusion is that corporate India has emerged much sharper and efficient post the second wave of the deadly virus attack. Overall then, the markets have offered much to cheer just as the haul of medals at the Olympics has ushered in a rejoicing spirit in the Indians. 

Winners and Losers

The positive earnings reported so far have kept the bulls in action as these along with liquidity are the only triggers holding the markets at higher levels along with some positive macroeconomic data. Going by the management commentary so far, it is clear that the negative impact of partial lockdowns in the recent wave was minimal and did not deter companies from delivering growth. One of the trends that clearly emerged is reduction in margins owing to the rise in raw material costs with the increase in commodity prices. The Indian IT sector companies witnessed one of the best quarters in many years this season. The outperformance of mid-tier IT companies was visible even as the new deal win momentum remained robust following the increase in demand for cloud migration and digital transformation.

The outlook of IT companies remains strong owing to a robust order pipeline and an upward spiral in the demand for IT services. However, the margins for IT companies remained under pressure as large deals were closed at lower margins. The margins were also impacted by wage hikes and fresh recruitment. For banks the trend of increasing provisioning remained intact. Collection efficiency improved. However, the gross NPA and net NPA situation needs to be tracked by investors. While the street celebrated the better-than-estimated performance of certain IT, pharmaceutical and textile companies, there were some large-cap companies that disappointed investors with their poor quarterly performance.

Some of the large-cap companies that did not bring a smile to the investors’ faces with their results this season include Dr. Reddy, Honeywell Auto, Bharat Electronics, LIC Housing Finance, Nestle India, Biocon, ICICI Lombard and ICICI Prudential Life.

The large-caps that were able to deliver outstanding results this season include APL Apollo Tubes, Hindalco, SAIL, Varun Beverages, Dr. Lal Path Lab, Deepak Nitrate, Vedanta and JSW Steel.

The mid-cap winners this season are BASF, Apollo Tricoat, Narayana Hrudalaya, KIOCL, Tata Steel BSL, Balaji Amines, Vardhman Textiles, Solar Industries, Jindal Stainless Hisar, Godawari Power, HFCL and Jindal Stainless.

The small-cap stocks that delivered impressive results this season are Emami Paper, Panama Petrochem, Somany Ceramics, Andhra Petrochem, Shri Jagdamba Polymers, Vardhman Special, Borosil Renewables, Cosmo Films, Nitin Spinners, Action Construction Equipments, Sarda Energy, HIL Ltd., NIIT, NGL Fine Chem, Sun Flag Iron, Fair Chem Organics, Kirloskar Ferrous, Sportking India, GNA Axles, Raj Ratan Global, Shakti Pumps, Gulshan Polyols, Thirumalai Chemicals, Swaraj Engines, Tinplate Company of India, Tata Steel Long Products, 5 Paisa Capital, Tata Metaliks, Steel Strip Wheels, Authum Investments and Bhansali Engineering.

According to Amarjeet Maurya, Associate Vice President (Mid-Caps), Angel Broking Ltd., the following mid-caps reported positive earnings and are expected to deliver top-line and bottom-line growth in the coming quarters.

1. Cera Sanitaryware: During 1QFY22, Cera Sanitaryware Ltd. (CSL) reported revenue of Rs 223 crore (up about 56 per cent YoY) mainly due to healthy volume growth and improvement in realisation. EBITDA increased by 200 per cent YoY to Rs 198 crore while the EBITDA margin improved by 430 bps YoY to 8.9 per cent due to better operating leverage. On the bottom-line front, the company has reported net profit of Rs 129 crore (reported Rs 29 crore in 1QFY21) due to strong sales and better operating performance.

2. Butterfly Gandhimathi Appliances: During 1QFY22, Butterfly Gandhimathi Appliances Ltd. (BGAL) reported revenue of about Rs 144 crore (up 88 per cent YoY) on the back of healthy growth in the kitchen appliances and cooker or cookware segment. On the EBITDA front, the company has reported profit of Rs 8 crore (reported loss of Rs 4 crore in 1QFY21) and EBITDA margin at 5.4 per cent due to better operating leverage. On the bottom-line front, the company has reported net profit of Rs 1 crore (reported loss of Rs 9 crore in 1QFY21) on the back of strong sales growth.

3. Emami Ltd.: During 1QFY22, Emami Ltd. (EL) sales grew 37 per cent to Rs 6.6 billion on healthy growth. Domestic business grew 42 per cent (volume growth was 38 per cent), international about 17 per cent and institutional grew about 34 per cent. Gross margin slightly declined by 50 bp. EBITDA grew 38 per cent to Rs 1.7 billion on the back of lower other overhead spends. EBITDA margins at 25.7 per cent have grown by 20 bps. The reported net profit grew by 97 per cent YoY to Rs 0.78 billion due to strong sales.

4. Radico Khaitan: During 1QFY22, Radico Khaitan Ltd. (RKL) reported revenue of Rs 603 crore (up 47 per cent YoY) due to volume growth of 59 per cent YoY. The disruptive second wave of the pandemic impacted the business from the second half of April. However, RKL rebounded in volumes by the second fortnight of June 2021. On the EBITDA front, the company has reported Rs 92 crore and EBITDA margin at 15.2 per cent, which is down by 320 bps YoY due to an unfavourable product mix which was impacted by the pandemic-induced lockdowns and scattered market timings. On the bottom-line front, PAT grew by 36 per cent to Rs 60 crore.

5. Dixon Technologies (India) Ltd.: During 1QFY22, Dixon Technologies (India) Ltd. (DTIL) reported consolidated revenue of Rs 1,867 crore (up about 268 per cent YoY) mainly due to healthy volume growth and improvement in realisation. EBITDA increased by 184 per cent YoY to Rs 48 crore while EBITDA margin contracted by 70 bps YoY to 2.6 per cent due to higher cost. On the bottom-line front, the company has reported consolidated net profit of Rs 18 crore (reported Rs 2 crore in 1QFY21) due to strong sales.

Sensex constituents' performance (1QFY22)

So far, we have with us the earnings of 24 Sensex companies. Some of the Sensex companies have impressed with the positive earnings while few have declared flattish earnings and have not been impressive this quarter. While SBI, ICICI Bank and IndusInd Bank were impressive in their quarterly performance by delivering above estimate results the leading private banks Kotak Mahindra Bank and HDFC Bank reported market estimate numbers at best. Infosys and Tech Mahindra impressed with its quarterly numbers while TCS and HCL Tech failed to impress the Dalal Street with its numbers. Bajaj Twins (Bajaj Finserv and Bajaj Finance) reported flattish numbers. Bajaj Auto , RIL , Asian Paints and Sun Pharma results were positive and better than expected.

What Is Tapering?
Tapering is nothing but a policy action that modifies traditional central bank activities. Tapering is adopted to influence the interest rates and to control the investors’ perception of the future direction of interest rates. The current tapering measure that the whole world is talking about is the central bank slowing the purchase of assets which theoretically is the reverse of quantitative easing (QE). Such a move could suck liquidity out of the system and will be sentimentally negative for the equity prices. 

Conclusion

There are several triggers at play in the current market scenario. The expectation of interest rate tapering by the US Federal Reserve is currently one of the biggest hanging swords for the US’ equities and with it the global equities. The other concerns for the market are rising inflation and increase in corona virus cases in the US and China. The increasing number of cases in Southeast Asia is the biggest threat to the global supply chain and the trend in these cases will be closely tracked by global investors. For Indian markets the progress of the monsoon and 1QFY22 earnings are the other big triggers that investors are focusing on. The monsoon is expected to be normal and the earnings have been resilient so far. 

There are some misses as also hits but the bulls on an average will take more positives from earnings rather than negatives in 1QFY22. Rising inflation means that the cost of raw material will increase and that will impact profit margins across the board for the corporate sector. Hence, inflation will not only increase the risk of rising interest rate but it will also impact the margins for most manufacturing companies. Therefore, going forward, inflation will play an important influencing agent in the equity market. Investors cannot take the earnings’ growth at face value as the commodity prices are close to peaking out.

Commodity stocks are cyclical stocks whose earnings can drop as the commodity prices correct. Investors will have to read between the lines even for those companies whose earnings have been reported ‘outstanding’. Profit booking was seen in several stocks that reported above estimated 1QFY22 results, as for example, SAIL, CIPLA, etc. Taking into account several companies that have posted positive results, it is observed that some of the average quality companies have posted very good results and hence the stock prices are trending upwards. The phenomenon of share prices going up only because of a positive financial trend is not something investors can rely on for consistent outperformance.

At this juncture it is important to identify quality companies that have posted outstanding results and are reasonably valued if not undervalued. The problem with below average quality companies is that the earnings can evaporate quickly unless there is a turnaround story that is expected to improve the fundamentals of the company in the long term. Thus, the trick is to identify stocks that have displayed good fundamentals in the long term and have declared above estimated results, which are now trading at reasonable valuation. Some of the quality banking and IT sector stocks have shown an improving financial trend and hence may be looked at more closely. At the same time, in 1QFY22 some of the non-leveraged financials have caught investors’ attention, especially the broking companies and AMC declared stellar set of numbers.

 

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