After tumbling to lows in March, equity markets have staged a strong comeback and recovered a large portion of their losses. Nifty, excluding financial stocks, is actually back to pre-Covid peak levels and overall Nifty valuations are also back. The Q4 earnings i.e. for the January 1 to March 31 of 2020 period is largely out for top companies. The Q4 contains about a two-week effect of the national lockdown. Due to this, expectations were low for this quarter, given that the economy came to a complete standstill. Do remember that March was the month when India and authorities woke up to the ferocity of the pandemic, which has so far claimed over 20,000 lives and racked up total infection cases of over seven lakh. So, how did Q4 pan out for earnings? Let’s take a detailed look. Keep reading.
Muted as expected
The March-quarter corporate earnings were weak and muted, but largely in line with analysts’ expectations. Motilal Oswal Research says profits declined 22% YoY (versus estimate of 25% decline) in light of the Covid pandemic and the subsequent lockdown in the last few days of March, which impacted business operations for most companies across sectors.
Most sectors reported double-digit declines in profits with Defensives like Healthcare, Technology and Consumer sectors being the only exception. Corporate commentary was expectedly uncertain and many companies did not provide guidance for 1QFY21/FY21. A lack of guidance means that company managements do not want to share with the investing public any expectations for the fear of going wrong.
Motilal Oswal argued that it continues to see downside risks for its FY21 earnings estimates (for companies under coverage) given the multiple moving parts and uncertain underlying demand backdrop.
For the Institutional Research Desk at HDFC Securities, Q4FY20 saw a severe impact on earnings given Covid-19 lockdown impact and commodity price collapse in March. Earnings misses were highest in financials (banks, insurance), consumer discretionary and energy sector. While FY21 earnings decline is a given, ~15% EPS CAGR over FY20-22 on aggregate basis looks optimistic to us. Like Motilal Oswal, the Institutional Research Desk at HDFC Securities, expects a high likelihood of further cuts to FY21 and FY22 earnings over the next 6-12 months.
Nifty Q4 show
Let us take a look at the key drivers of Q4FY20 NIFTY50 earnings. According to ICICI Securities, sectors with topline growth > Q4 nominal GDP growth of 7.5 per cent: private banks (strong NII growth), telecom (ARPU increase), agrochemicals (strong volume demand), pharma (improved demand) and utilities (capacity addition). Food-FMCG, IT and infrastructure grew at less than nominal GDP. PSU bank had flat NII growth.
Sectors with declining Q4 topline indicates weak demand due to lock-down effect and/or price erosion: Weak demand for cement and discretionary consumption - auto, media, paints, jewelry, tobacco and non-food FMCG. Metals and oil & gas sales decline due to weak demand and price decline in global commodities.
Operating profit margin (EBITDA margin) improved / remained stable in the growing sectors (agrochemicals, telecom, IT and pharma) as well as declining topline sectors (paints and cement). NIM’s for private financials stable while remained under pressure for PSU Bank. Other sectors saw a dip in Operating margin.
Q4 PAT largely impacted by sectors with adverse operating leverage (consumer discretionary and commodities) and Covid-19 related provisions by financials. NBFCs more vulnerable in terms of rise in NPA.
As per ICICI Securities’ readings of the Q4FY20 management commentaries, they indicate supply side normalization, private capex deferment, rural demand ahead of urban, essentials ahead of discretionary, austerity drive in corporates and households, weaker credit growth, among others.
In terms of outlook, overall NIFTY50 ‘Profit after Tax’ (PAT) dipped by 22 per cent in Q4 resulting in FY20 PAT growth of five per cent. ICICI Securities expects Nifty-50 EPS growth to be extremely volatile over FY21 and FY22 due to the dip.
The stock and sector coverage depends on different brokers. Some track a few companies. Motilal Oswal universe sales/ EBITDA/PBT/PAT declines stood at 5%/6%/32%/22% YoY (v/s est. decline of 9%/9%/22%/25%). Only 4 sectors – PSU banks (from loss to profit), healthcare (10.8%), technology (1%) and consumer (0.3%) – posted YoY profit growth.
Automobiles and telecom sectors posted losses. Private banks, O&G, capital goods, metals and NBFC sectors saw YoY PAT declines of 19%, 30%, 39%, 35% and 32%, respectively. Of the 18 sectors that Motilal Oswal Research tracks, 6/1/11 sectors delivered PAT that was above/ inline/below their estimate.
As per MOFSL report, private banks’ results were below expectation with PBT/PAT declines of 27%/19% on Covid-19 related provisioning. Loan growth moderated across segments for most banks (except HDFC Bank, which saw strong growth in corporate book) due to the weak macro environment.
The NBFC Universe’s results were also below expectations as PAT declined 32 per cent YoY, mainly due to sluggish AUM growth and Covid-related provisioning. BAF was an exception and posted 27% YoY AUM growth in the quarter.
Consumer sector posted flattish PAT (v/s est. 11.4%) aided by lower taxes. Heavyweights like HUL and Asian Paints’ results were below expectations as profits declined 8% and 2% YoY, respectively. Cement sector’s results were above expectations as it posted just 5% YoY decline in profits (v/s est. 11% decline).
Technology Universe posted in-line PAT growth of 1% YoY. Capital Goods too disappointed with 39% YoY decline in PAT.
For Automobiles, PBT plummeted 96% YoY (much higher than est. decline of 72% YoY), largely due to losses in Tata Motors. Excluding Tata Motors, Auto PBT declined 35% YoY. Utilities impressed with 8% YoY PBT growth (v/s est. 43% decline). PBT for Metals’ Universe declined 42% YoY (v/s est. 54% YoY decline) while Oil & Gas (O&G) universe’s PBT plunged 73% YoY (v/s est. 61% YoY decline).
Two- thirds of the MOFSL Universe posted YoY PAT declines as operations were impacted due to the lockdown with adverse demand-supply implications. Importantly, direction of earnings revision for the broader markets still remains downward – with 113 companies in the MOFSL Universe witnessing an earnings cut of >5% and 25 witnessing upgrades of >5%+ for FY21.
What happens now
The 4QFY20 corporate earnings were muted, but on expected lines. Given the disruption owing to the Covid pandemic, earnings recovery seems pushed back by at least a year.
Meanwhile, markets are looking beyond FY21, aided by global recovery and gradual return to normalcy. Amidst the overall challenging macros, one silver lining is the ‘Rural’ economy, which has seen lesser damage from the Covid-19 pandemic.
Drivers for rural income remain robust with the strong start to monsoons, robust Kharif sowings, and sharp hike in allocation to MGNREGA. Near-term earning predictability has been impaired and hopes have now shifted to potential FY22E earnings recovery.
Investors must note that while there is broad-based recovery across sectoral indices, but some degree of fatigue setting in. Markets eventually follow earnings trajectory. Q1 results will start trickling in soon. IT, consumer and telecom are likely to post better earnings and demonstrate better earnings growth trajectory in the upcoming results, according to Axis Securities.
The economic risks continue to remain quite high with FY21 likely to see a four per cent compression in GDP. Even as bulk of the compression was in Q1FY21, the impact of the compression will be seen in the forthcoming quarters as it will manifest in slower growth rate, Axis Securities added.
BFSI is the largest sector in terms of Nifty allocation. Stock picking holds the key. Except for the BFSI sector, there is limited valuation comfort across sectors. The market has breached the mean valuations on the upside. Experts don’t find the market to be cheaper even after considering the earnings are at cyclical bottom.
As per Varun Lohchab, Head Institutional Research, HDFC Securities, economic recovery is progressing on expected lines with phased unlocking With phased unlocking, economic activity is coming back to normalcy with certain pockets like rural demand (tractors, FMCG), two wheelers, cement, power demand faster to recover.
“Urban discretionary consumption is still lagging given impact on top cities. We are currently building in full normalcy in our estimates by Sep end and pace of recovery is on expected lines. However, we believe achieving 80-90 per cent normalcy would be easy, but reaching back to 100 per cent activity level and beyond would be a challenge and slow grind,” says Lohchab.
With recent run-up back to pre-Covid levels for most sectors (except financials, infra, metals), risk-reward has again turned unfavorable with limited upsides on top picks. Lohchab talked about maintaining a mix of defensives (telecom, IT, pharma, utilities), quality cyclicals (select banks, cement, autos, infra, consumer discretionary) with a positive bias towards technology (telecom, IT) and manufacturing led gradual economic recovery. “We tweak our model portfolio with a minor cut in weights for retail, cement, NBFCs, pharma, etc., while adding weights in IT, insurance, consumer appliances. introducing Mphasis, Max Life and Crompton Consumer to portfolio,” he signed off.
The writer is a journalist with 14 years of experience