HDFC Bank, Bajaj Finance to HUL, Q2 FY21 earnings highlights so far: A quick report for investors

ICICI Securities says Q2 FY21 earnings beat so far driven by low expectations, better demand from rural India, export markets and government spending. Low expectations after one of the sharpest downgrades to Nifty 50 forward earnings (>30%) due to the impact of Covid is helping higher number of beats thus far during Q2 FY21. However, apart from low expectations, positive demand from rural India, government spending, export markets, and essentials is also helping the earnings picture. Lower input cost and cost control in general is helping profit margins. Discretionary consumption continues to contract YoY while the GFCF (gross fixed capital formation) is being supported by rural India and government spending.

ICICI Securities see signs of pent up demand in paints and building materials. On the NPA picture, early results are mixed with HDFC Bank showing robust business growth and control on NPAs while NBFCs and smaller banks struggle on both the aspects. Going ahead, resurgence of Covid in some of the key developed markets such as Europe and the U.S. could impact the export recovery trend seen in Q2 FY21. On the other hand, domestic demand could continue to normalise to pre Covid levels in a gradual manner. ICICI Securities see no sign of private participation in GFCF growth so far and it seems highly unlikely in the near term given the weak demand environment and low utilisation levels.

Sharp downgrades to forward earnings resulted in higher number of beats thus far:

Since 2014, the 1 year forward earnings for the Nifty 50 had been overestimated on an average by 20%. The sharp downgrade to forward earnings of the Nifty 50 index (>30%) in Q1 FY21 followed by a normalising economy would result in a decline in the estimation error. Early Q2 FY21 results are validating this view with more beats than misses so far.

Export markets show improved demand:

Course correction in the BFSI space after the dip in Q1 FY21 and demand revival in developed markets (EU, U.K. and U.S.) as it emerged from the first wave of Covid, resulting in better than expected growth for I.T. sector. After the dip in Q1, margin expansion was witnessed across I.T. companies. Bajaj Auto in the Auto sector indicated improved export demand for motorcycles in Latin America and Africa.

Consumption trends differ significantly:

Essentials demand has been robust (HUL, Britannia and Nestle) while the consumer discretionary space (Shoppers Stop, Bajaj Auto) continues to see demand contraction.

Organised players in paints and building materials indicate resilient demand:

ICICI Securities believe this is probably a sign of pent up demand after the slump in Q1 as aggregate demand continues to be weak.

Gross fixed capital formation (GFCF) supported by rural space and government spending:

Cement demand and profitability has been robust driven by demand in the rural space and government spending. 

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Financials could turn out to be a litmus test for quality of business:

HDFC Bank bucked the trend and registered robust growth and control on NPAs while NBFCs and smaller banks (Bajaj Finance, Federal Bank and SBI Cards) struggled on both aspects.