Consumption led the miss and expectation downgrades in Q2; 8 trends highlight by Elara Capital

Margin pressures and commodity prices emerged as the central themes so far in the second quarter, playing out differently for varied sectors, ensuing hits, and misses, Elara Capital said in a note.

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Forty-four Nifty companies, or about 95 per cent of the Nifty50 companies and over 55 per cent of the NSE 500 market cap have reported results so far for the quarter ended September (as of 9 November, 2021).

On an aggregate basis, two-year Nifty profit after tax (PAT) compound annual growth rate (CAGR) of 19.2 per cent so far is 6 per cent above Elara/consensus estimates. The Elara PAT beat-to-miss ratio estimate stands at 2.4x, unlike in the past quarter where number of misses outdid beats.

The report highlighted that over Q2FY20-Q2FY22, commodities such as materials and energy, which accounts for 48 per cent (two-year PAT CAGR 37.5%) and financials 46 per cent of incremental PAT (two-year PAT CAGR 32%).

This was followed by IT adding 12 per cent of the incremental PAT. The consumption space has accounted for incremental loss (4%) in the past years, led by incremental loss in autos, with staples being broadly flat.

BPCL, Dr. Reddy’s Laboratories, Eicher Motors, Shree Cement and Reliance reported the biggest beat Elara estimates for adjusted PAT. The biggest miss came from Asian Paints, Maruti Suzuki, Britannia, UPL and NTPC.

JSW Steel, M&M, ICICI Bank, Dr. Reddy’s Laboratories and Bajaj Finance saw the highest Elara FY22E PAT upgrades, with Tata Motors, Maruti Suzuki, Asian Paints, Bajaj Auto and Axis Bank posting the steepest Elara FY22E PAT downgrades.

Top 8 sectoral trends highlighted by Elara Capital:

Consumption:

The consumption-oriented sectors have borne the biggest brunt from recent commodity price hikes, which led to earnings miss on weaker margins across segments – Autos, Paints, Staples.

Raw Material Impact:

While raw material prices have marred margins, pricing power across sectors remained mixed (though expected to recover in the next few months).

Auto Sector:

The auto sector saw volume constraints emerging on account of chip shortage. Within this space, the biggest miss came in from Maruti Suzuki, Tata Motors, Asian Paints, and Bajaj Auto.

Energy Companies:

Energy companies posted a 35% two-year PAT CAGR and a 27%/23% beat against consensus/Elara expectations, respectively, led by strong GRMs and retail margins posted by OMCs (BPCL, IOCL) as also recovery in cracks for Reliance Industries.

Margin Pressure:

Margins across segments have contracted YoY and QoQ owing to raw material price rise. Compared with pre-COVID quarter (Q2FY20), consumption margins have starkly contracted owing to weak pricing power, volume impact (specific to autos), and raw material price shocks.

Banks:

Even as India’s overall credit growth remains tepid at ~7% YoY, private banks continue to gain market share and post strong results led by: 1) lower provisions seen for ICICI Bank, Axis Bank, Kotak Bank and HDFC Bank and 2) robust loan growth seen for ICICI Bank, Kotak Bank and HDFC Bank.

Within the PSU banks space, SBI delivered good results on strong core NIM and low incremental stress.

IT Sector:

The IT sector’s Q2 results were broadly in-line, with strong demand outlook led by digitization drive, deal wins and cloud migration. Most companies handled margins well despite attrition pressure and wage hikes.

Overall, we remain bullish on the space given the ongoing digital transformation and growth potential.

Pharma:
 
Led by strong India and rest of the world (ex-US) performances, all three Nifty Pharma companies (Sun, Cipla and Dr. Reddy’s Laboratories) posted strong results. Sectoral pipeline in the US is expected to be better in FY23.

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)