The earning season for the second quarter of the financial year 2021-22 theoretically comes to an end this week. The overall quarterly earnings of the major companies have been above the domestic brokerage firm Motilal Oswal’s expectations, it said in the Q2 results preview report on Wednesday.

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The brokerage firm said, “The quarter brought to the fore two important trends: an improving demand environment post the opening up of the economy and rising vaccinations, and the impact of rising input costs on operating margins.”

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The margins of sectors such as speciality chemicals, autos, cement, and consumer staples witnessed contraction during the quarter. Of 106 major companies from large and mid-cap categories, at least 51 of them saw an earnings upgrade of 5 per cent, while 55 were downgraded below 5 per cent in Q2.

The earnings in Q2FY22 were largely led by cyclical sectors (such as Oil & Gas and Metals); improved asset quality in the BFSI sector, and strong topline growth in the Technology sector, it said.

The management commentaries across the board suggest an improved demand environment. While high energy and raw material prices, however, continue to be a concern, Motilal Oswal pointed out.

The brokerage said, “We remain Overweight on BFSI, IT, Consumer, Metals, Cement, and Capital Goods; Neutral on Auto, Telecom, and Healthcare; and Underweight on Energy and Utilities.”

The report mentioned, “Around nine sectors posted double-digit or higher two-year profit CAGRs – the prominent ones among these are Metals (223%), PSU Banks (98%), Cement (33%), Private Banks (25%), O&G (24%), Healthcare (18%), Consumer Durables (12%), and Technology (12%).”

Q2 Key Highlights Sector-wise:

Technology: The Q2FY22 marked the fifth quarter of robust QoQ (quarter-on-quarter) revenue growth; 12 of 13 companies reported in-line/higher-than-estimated PAT (profit after tax). 

Oil & Gas: Led by OMCs (oil marketing companies), the segment posted a better-than-expected performance on the back of strong marketing margins. 

BFSI: Most banks demonstrated steady recovery in loan growth, led by the Retail, SME, and Business Banking portfolios. The growth outlook and asset quality showed sequential improvement. NBFCs saw a sharp improvement in disbursements and collection efficiency. 

Consumer: 11 of 18 companies posted double-digit sales growth. Discretionary consumption showed a strong recovery during Q2. Gross margins, however, remained impacted by higher RM prices. 

Cement: While demand remained flat QoQ due to the monsoons, profitability was impacted by high energy costs, freight costs, and an increase in other expenses.

Upgrades and Downgrades

The top upgrades (FY22E) were as follows: BPCL (22%), Shree Cement (15%), Titan (13%), ONGC (11%), M&M (9%), IOC (9%), Wipro (7%), Sun Pharma (7%), SBI (6%), Tech Mahindra (6%), Hindalco (5%), and ICICI Bank (5%).

The top earnings downgrades (FY22E) came in as follows: Tata Motors (Profit to Loss), Asian Paints (-23%), Maruti (-16%), Tata Steel (-7%), JSW Steel (-7%), Britannia (-7%), Axis Bank (-6%), Divi’s Lab (-5%), Bajaj Finance (-5%), Eicher Motors (-5%), and Bajaj Auto (-5%).