Q3FY22 Getting Back On Track
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 sets the tone for market direction and helps investors become cognizant of the ground realities in the listed space. Indian companies seem to be making a comeback, albeit slowly and steadily, putting the COVID-19 pandemic woes behind. Armaan Madhani takes stock of Q3FY22 earnings and deciphers the trend this season.
The quarter ended December 31, 2021 was the first fully operational quarter without any pandemic-driven lockdown restrictions in the country since March 2020. The Q3FY22 earnings season is off to a great start, with IT giants along with several mid-cap and small-cap companies reporting strong set of numbers. The senior management of most companies are optimistic with respect to their future demand outlook for the upcoming quarters, as they feel that the worst could be in the rear-view mirror. However, a slew of companies are yet to announce their results and with the Union Budget for 2022-23 once again upon us, the upcoming weeks will be action-packed for investors.
IT Companies’ Performance (Q3FY22)
India's largest IT services company, Tata Consultancy Services (TCS), witnessed strong demand across business segments, which propelled third-quarter revenue growth to its highest in five years. The IT behemoth posted consolidated net profit of ₹9,769 crore for Q3FY22, up 12 per cent from ₹8,701 crore reported a year ago. During the quarter, TCS signed deals worth USD 7.6 billion, with a book-to-bill ratio of 1.2 times. According to company management, the deal intake remained well-balanced across deal sizes during the quarter and they are confident of delivering double-digit revenue growth in FY22.
The company's board has also approved buyback of shares worth up to ₹18,000 crore, which happens to be the fourth and biggest such exercise by India’s largest IT services firm in the past five years. Post healthy Q3 results and buyback approval, many brokerage houses elevated their respective target price on TCS, considering strong growth numbers, steady deal wins, consistent execution and robust order pipeline. This drove optimism for the stock and the scrip of TCS recently hit an all-time high of ₹4,038.40, eclipsing its previous high of ₹3,990 recorded in October 2021. TCS could soon become the second listed company to enter the ₹15 trillion market capitalization club.
Infosys also managed to beat street estimates, reporting consolidated net profit of ₹5,809 crore for Q3FY22, an increase of 12 per cent from ₹5,197 crore clocked in the same period last year. Large deal wins enhanced the total contract value (TCV) to USD 2.53 billion over the quarter. With digital transformation rapidly scaling across verticals and regions, growth remained broad-based for the company during the quarter, aided by robust deal momentum. The management has revised revenue guidance for FY22 upwards to 19.5-20 per cent, powered by sequential growth of 7 per cent in Q3FY22.
Wipro, in comparison to its peers TCS and Infosys, failed to meet street estimates, reporting net profit of ₹2,969 crore for Q3FY22, which was flat when compared with ₹2,968 crore reported a year ago. As for the outlook for Q4FY22, Wipro expects revenue from IT services business to post a sequential growth of 2-4 per cent. Likewise, HCL Technologies also failed to impress analysts by posting a 13.6 per cent fall in net profit to ₹3,442 crore for Q3FY22 from ₹3,982 crore recorded in Q3FY21. The management expects to see a strong deal pipeline on the back of robust demand environment. During the quarter, Wipro closed 11 large deals worth USD 600 million and HCL Tech secured new contracts worth USD 2.1 billion.
A common concern among IT companies during the course of Q3FY22 has been the spike in attrition rate. TCS attrition rate soared to 15.3 per cent (voluntary TTM) on a trailing 12month basis. Attrition rate for Infosys surged enormously to 25.5 per cent from 11 per cent in the same period last year. Wipro saw attrition rising to 22.7 per cent (voluntary TTM) on a trailing 12-month basis from 20.5 per cent in the Q2FY22. To combat this, the hiring engines of these IT companies are firing on all cylinders. According to staffing firm Xpheno, the top three companies (i.e. TCS, Infosys and Wipro) collectively made net addition of over 1,34,000 employees in the ongoing fiscal, nearly four times more as compared with last year.
The competition for talent is spiraling between IT companies as well as global capability centres (GCC) and startups. Kamal Karanth, co-founder of staffing firm Xpheno, in an article published in Economic Times, states: “With no tested method to arrest near-term attrition in a buoyant market, this doubledigit 15-25 per cent attrition could well continue for at least 2-3 quarters to come.” Talent acquisition, development and retention will be the key drivers for IT companies in the upcoming quarters.
Tata Elxsi and Sonata Software posted strong results for the quarter ended December 31, 2021. Meanwhile Mindtree, L&T Technology Services, L&T Infotech and Newgen Software disappointed investors with their mixed performance.
"It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong"
- George Soros
Sensex Constituents’ Performance (Q3FY22)
HDFC Bank was the first lender to report Q3FY22 earnings and furnished a buoyant performance with healthy loan growth and improved asset quality. The third quarter net profit for the private lender stood at ₹10,342.2 crore, exhibiting increase of 18 per cent year-on-year by virtue of strong growth in net revenues and lower provisions, which gave a fillip to its bottom line. Its net interest income (NII) for the quarter under review grew by 13 per cent to ₹18,443.5 crore, up from ₹16,317.6 crore a year ago.
Bajaj Finance once again put a big smile on investors’ faces, exceeding expectations and delivering all-round stellar third quarter results. The NBFC giant reported a consolidated net profit of ₹2,125 crore for the December quarter, demonstrating robust growth of 85 per cent from ₹1,146 crore recorded in the same period a year ago. Its net interest income (NII) for the quarter jumped 40 per cent to ₹6,000 crore as against ₹4,296 crore in Q3FY21. As a result, the stock of Bajaj Finance skyrocketed to hit a fresh life-time high of ₹8,043 on the bourses.
Bajaj Finserv disappointed investors by reporting a decline of 2.63 per cent in consolidated net profit for Q3FY22 to ₹1,256 crore from ₹1,290 crore in the corresponding quarter last year. The company said its total revenue surged 10.21 per cent year-on-year basis to ₹17,589 crore from ₹15,959 crore in the same quarter a year ago. Similarly, Asian Paints posted 18.5 per cent decline in consolidated net profit to ₹1,031.29 crore for Q3FY22 as inflationary trends in raw material prices continued to impact the company's gross margin across businesses.
India’s largest cement manufacturer, UltraTech Cement, surpassed analyst estimates, reporting a consolidated net profit of ₹1,708 crore for Q3FY22, which is 8 per cent higher as against ₹1,584 crore reported a year ago. The company was also able to reduce its net debt by ~8 per cent during the first nine months of FY22. The company’s board has also approved capital expenditure of ₹965 crore for modernization and capacity expansion of Birla White from the current capacity of 6.5 LTPA to 12.53 LTPA in a phased manner. Several brokerage houses are bullish on the stock, stating that the worst is behind for the cement maker and earnings may improve with better margins in the coming quarters. So far, only 5 out of 30 Sensex companies have reported results for Q3FY22, with only 3 of them impressing investors by posting better than expected earnings. Investors should watch out for the announcement of quarterly results of the remaining 25 Sensex companies in the forthcoming weeks.
Winners & Losers
Textile majors Alok Industries and Trident reported strong numbers for Q3FY22. Alok Industries reduced its net loss to ₹0.09 crore for the period ended December 31, 2021 as against net loss of ₹35.12 crore reported in the same period previous year. Trident reported 88 per cent jump in consolidated net profit to ₹211 crore on the back of 84 per cent rise in revenue from operations which stood at ₹1,980 crore.
Brokerage firm Angel One hit a home run, making investors proud by reporting 125 per cent year-on-year growth in consolidated net profit which stood at ₹165.5 crore for the December quarter. Its revenue from operations grew 94.7 per cent year-on-year to ₹597.3 crore. The company announced an interim dividend of ₹7 per share.
Avenue Supermarts, the owner and operator of retail chain DMart, reported lower than expected profit for the third quarter of the fiscal. The consolidated net profit for the quarter came in at ₹553 crore as compared to ₹447crore in the corresponding quarter of last year. Its PAT margin stood at 6.0 per cent in Q3FY22 as compared to 5.9 per cent in Q3FY21. The management of the company said that inflation impaired its business during the quarter.
Bajaj Auto, the two-wheeler manufacturer, reported a decline of 22 per cent in its standalone net profit for the third quarter to ₹1,214 crore from ₹1,556 crore in the corresponding quarter last year. Its EBITDA margin declined to 15.6 per cent on a sequential and year-on-year basis. It stood at 16.4 per cent in the previous quarter and 19.8 per cent during the same quarter last year. The auto sector has faced a myriad of headwinds over the third quarter such as rising raw material costs, aggravating chip shortages and the disruption led by EVs.
Some large-cap companies that failed to deliver impressive results include JSW Energy, Syngene International, Oracle Financial Services Software, ICICI Prudential Life Insurance and ICICI Lombard General Insurance.
The mid-cap winners this earnings season are DCM Shriram, Network 18 Media & Investments, TV18 Broadcast and Delta Corp. On the other hand, losers include CESC, HFCL, Sterlite Technologies, Just Dial and Tatva Chintan Pharma Chem.
Some small-cap companies that brought a smile on investors’ faces are Ceat, Tinplate Company of India, Ramakrishna Forgings, GTPL Hathway, Wardwizard Innovations & Mobility, Fineotex Chemical and Mishtann Foods. The small-cap companies that disappointed investors are Tata Steel Long Products, Hathway Cable & Datacom, Tata Metaliks, Bhansali Engineering Polymers, Aptech, G M Breweries, GNA Axles and Shakti Pumps (India).
Conclusion
With large number of companies yet to release their quarterly results, investors should bear in mind that despite strong demand, earnings could be dampened by continued supplychain disruptions, increasing cases of Covid-19 Omicron variant and surging cost-push inflationary pressure faced by companies during the month of December 2021. After hitting a 10-month high in November, India’s manufacturing activity lost momentum in December, slackening to a three-month low amid fears that the rapidly spreading third wave of the pandemic may impair output and consumer sentiment. As per data released by analytics firm IHS Markit, Purchasing Managers’ Index (PMI) for manufacturing fell to 55.5 in December from 57.6 in November.
Similarly, India’s PMI for services also slipped to a three-month low of 55.5 in December from 58.1 in November. India's annual wholesale price-based inflation eased marginally in December to 13.56 per cent, but remained in double digits for ninth successive month, reflecting rising input costs for firms. Many of these firms are steadily passing on the additional cost burdens to consumers, which could dampen demand. Investors should keep a close watch on companies announcing their quarterly results in the forthcoming weeks.