Corporate earnings in the first quarter of fiscal 2022 have been in line with the elevated expectations supported by a lower base. The localised restrictions in several parts of the country amid the second COVID-19 wave had a lesser impact as compared to that of the first wave that witnessed stringent lockdowns in the April-June period of last year.
The sectoral earnings have diverged as the high commodity prices in Q1FY22 impacted all sectors differently. High commodity prices have dented the margins of select sectors such as auto, consumer staples, and durables, while cyclical sectors such as metals and oil and gas (O&G) have benefitted.
Meanwhile, management commentaries across the board indicate an improvement in the demand environment in the second quarter of fiscal 2022 driven by the easing of restrictions and a sharp reduction in active COVID-19 cases.
Analysts are of the view that the fast pace of vaccination and the likelihood of a normal monsoon season would help further recovery in corporate earnings as economic activities pick up.
During the quarter ended June 2021, sales of Nifty companies increased around 50 percent YoY, while EBITDA/PBT/PAT growth has come in at 41 percent/103 percent /101 percent YoY, according to a report by Motilal Oswal.
Metals, oil & gas, and technology have accounted for 68 percent of the incremental YoY profit accretion in Q1FY22.
Among sectors, Q1FY22 marks the fourth quarter of robust sequential revenue growth for IT companies.
Most private banks reported fresh slippage from the retail segment, although the impact on asset quality has been less severe than that seen during the first wave. Private banks’ earnings have grown 29 percent YoY, the report said.
Meanwhile, NBFCs have reported results below expectations as lockdowns have impacted collections and disbursements, leading to stress buildup across segments.
The metal sector witnessed the highest ever quarterly earnings of Rs 33,700 crore, which have contributed to 45 percent of incremental PAT, aided by strong price realisation in the domestic and export markets.
Led by oil marketing companies, oil & gas sector has posted a better-than-expected performance from the marketing segment.
In the consumer space, 16 of 18 companies have posted double-digit sales growth, aided by the deflated base of 1QFY21 and buoyancy in rural and urban demand. Raw material prices, however, have continued to impact the gross margins of companies, as per the report.
Another brokerage firm HDFC Securities said despite a strong second COVID wave, the Nifty consensus of FY22 EPS remains largely unchanged because the impacted sectors have a low weight in aggregate earnings and this would not change unless banks see a material cut in earnings.
"Nifty is trading at 23x FY22 EPS, after building in 39 percent EPS growth in FY22, which can come through, aided by global cyclicals and select large banks. So, while overall EPS estimates are less at risk despite the second wave, the composition of earnings will change if high PE sectors see earnings cut and low PE sectors see earnings upgrades," said Varun Lohchab, institutional research analyst, HDFC Securities.
The brokerage house believes it will remain a stock pickers’ market in FY22 with bottom-up positive risk-reward investment ideas still available.
"Markets continue to favour technology and export-oriented sectors compared to domestic cyclicals which is leading to readjustment of index weights away from financials," said Punit Bahlani, institutional research analyst, HDFC Securities.
In its model portfolio, the brokerage maintains bias towards economy-facing and value sectors. It has been cutting weights in the chemicals and IT sectors, post the sharp run-up in select stocks.
(Edited by : Jomy Jos Pullokaran)