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Covid to dampen Q1FY22 results, subdue sentiments

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Indian-Rupees

Covid’s second wave along with regional lockdowns are expected to dampen the Q1FY22 earnings result season, thereby, unleashing volatility.

Notably, the trend might lead to value correction, this in theory, can trigger another bull run.

However, the scale of this expected trend might only be known via the impact on revenue that different sectors sustained in respect to lockdown’s effect on operations and sales.

Other factors such as high commodity and fuel prices along with impact of rural Covid spread on the FMCG demand will exert pressure on Q1 revenues.

In contrast, pharma companies could benefit due to the second Covid wave, besides, metals, BFSI and IT are expected to drive earnings’ growth in Q1FY22.

Furthermore, in Q1FY22, Indian corporates have the benefit of a low base, while during Q1FY21 the aggregate net sales of most companies had fallen sharply and their net profits had plunged.

“In Q1FY22, though there was disruption or partial lockdown in several states in April or May due to the second Covid wave, the impact of this on the business activities does not seem to be as severe as in last year. Also states were well prepared this time to deal with the situation,” said Deepak Jasani- Head of Retail Research at HDFC Securities.

“Trends in shift from informal to formal sectors, impact of raw material price increase and inventory gains or losses due to China intervention in commodity markets will be interesting to watch out for. In the BFS space, asset quality or slippages trends in the books of lenders will be monitored closely.”

Additionally, Jasani said that several high-frequency macro indicators have improved lately including power consumption, auto fuel demand, e-way bills, exports amongst others.

“Rising commodity costs, higher inflation, and a likely rate increase are key concern areas.”

According to Gaurav Garg, Haed of Research at CapitalVia Global Research: “The opening of the season was good by TCS, it posted a net profit growth of 28.5 per cent, it also posted a growth of 18.5 per cent in consolidated revenue.”

“However, this earnings season may have few surprises as it coincided with the second wave of the pandemic and therefore there might be mixed results.”

Garg cautioned investors to be prepared for mixed results owing to the pandemic restrictions in the previous quarter, it may not be extensive as the previous lockdown but still some impact is expected.

“Markets seem to be correcting themselves from their resistance and positive earnings may prove to be the required stimulus to boost market further up.”

In a report Crisil Research expects India Inc to report a sequential decline of 8-10 per cent in revenue at Rs 7.3 lakh crore for the first quarter of this fiscal.

The decline might be led by consumer discretionary products such as automobiles, which saw volumes impacted by the lockdowns across states to contain the second wave of Covid-19 infections.

Nevertheless, Crisil Research said on a yearly basis, the revenue will rise 45-50 per cent on a low base.

The report pointed out that improvement will be seen across sectors, riding on higher volume on a low base and greater realisations due to increase in commodity prices.

Factoring out the commodity sectors, on-year revenue growth will be lower at 37-40 per cent, the report added.

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Cyclicals to drive Q3FY22 earnings growth: MOFSLA

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Corporate earnings growth for the third quarter of FY22 is expected to be led by cyclical stocks, Motilal Oswal Financial Services (MOSFL) said in a report.

Earnings growth is anticipated to be driven by metals, oil and gas and BFSI (Banking, Financial Services and Insurance) sectors.

In its report, MOSFL said that economic recovery backed by festive demand, higher commodity prices and improvement in asset quality in financials are expected to back this trend.

“There remains a clear divergence in 3QFY22 earnings growth. Global cyclicals, such as oil and gas and metals, continue to drive aggregate earnings growth, while BFSI profits are led by improvements in asset quality and credit growth,” the report said.

“Technology is likely to continue its momentum, propelled by strong revenue growth,” it added.

The auto and cement sectors are anticipated to drag earnings down, led by poor demand and higher commodity prices.

“Consumer, healthcare, capital goods, consumer durables and specialty chemicals are predicted to report single-digit YoY profit growth. Input cost pressures continue to weigh on gross margins for cement, specialty chemicals, autos, consumer staples and durables sectors,” the report said.

The report pointed out that Asian Paints, Bharti Airtel, BPCL, IOC, Tata Steel, JSW Steel, Titan, Hindalco and ONGC have seen an upgrade in their FY22 earnings.

“Companies that have seen downgrades to their FY22E earnings are Tata Motors, Maruti Suzuki, Ultratech Cement, Hero Motors, Shree Cement, Coal India, Axis Bank and HUL,” it said.

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HDFC Bank’s Q3FY22 YoY net profit up 18.1%

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 Lending major HDFC Bank on Saturday reported a year-on-year rise in net profit of 18.1 per cent for the third quarter of FY22.

The bank’s net profit increased to Rs 10,342.2 crore during the period under review over the quarter ended December 31, 2020.

Besides, the bank’s net interest income (income earned less interest expended) for the quarter under review grew by 13 per cent to Rs 18,443.5 crore from Rs 16,317.6 crore for the quarter ended December 31, 2020.

The lender’s net revenues (net interest income plus other income) increased by 12.1 per cent to Rs 26,627 crore from Rs 23,760.8 crore for the quarter ended December 31, 2020.

“Advances grew at 16.5 per cent, reaching new heights driven by relationship management, digital offering and breadth of products. Core net interest margin was at 4.1 per cent. New liability relationships added during the quarter remained at an all-time high,” HDFC Bank said in a statement.

“This continued focus on deposits helped in the maintenance of a healthy liquidity coverage ratio at 123 per cent, well above the regulatory requirement, which positions the bank favourably to capitalise on growth opportunities,” it added.

As per Q3FY22 results, provisions and contingencies for the quarter rose Rs 2,994 crore (consisting of specific loan loss provisions of Rs 1,820.6 crore and general and other provisions of Rs 1,173.4 crore) as against total provisions of Rs 3,414.1 crore for the quarter ended December 31, 2020.

“Total provisions for the current quarter included contingent provisions of approximately Rs 900 crore,” it said.

“The total credit cost ratio was at 0.94 per cent, as compared to 1.30 per cent for the quarter ending September 30, 2021 and 1.25 per cent for the quarter ending December 31, 2020,” it added.

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Lenders expected to exhibit strong Q3FY22 results

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 Listed lenders in India’s equity markets are expected to report ‘optically’ strong earnings growth for Q3FY22, said HDFC Securities in a report.

Accordingly, the brokerage house expects its coverage universe of 23 lenders to report 51 per cent YoY growth during the period under review.

This trend, the report said will come largely on the back of expected normalisation of provisions.

“The pace of collections and recoveries continues to improve, which, concurrent with normalised economic activity, is likely to moderate the stressed pool,” the report said.

“Disbursements are likely to witness healthy growth, driven by seasonal pick-up in retail loans as large corporate Capex remains elusive.”

As per the report, the revival in business momentum is likely to drive a 10.4 per cent YoY loan growth for the brokerage house’s coverage universe, with large private banks and large NBFCs (BAF) continuing to clock market share gains.

“The third wave of the pandemic is unlikely to impact Q3 earnings except in underlying sectors like travel and tourism that are already under stress.”

“However, we expect most lenders to maintain a surplus provisioning buffer for potential asset quality issues. We tweak our FY22E-FY24E forecasts for select lenders to factor in lower credit growth and marginally higher credit costs.”

Besides, HDFC Securities continue to prefer large banks with strong balance sheets and formidable deposit franchises.

Furthermore, it cited that business momentum continues to gather pace.

“In a quarter relatively unaffected by the pandemic and near-normal resumption of economic activity, we expect to see strong sequential growth in disbursements, particularly in retail and SME segments, riding on seasonal and pent- up demand.”

“Provisional filings suggest that banks within our coverage universe continue to gain market share as reflected in loan growth at 12 per cent YoY compared to system-wide YoY credit growth at 7 per cent.”

At present, the brokerage house has 23 lenders in its coverage universe including ICICI Bank, SBI, Bajaj Finance, SBI Cards, and Axis Bank.

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