Q4FY22 : A Mixed Bag of Opportunities!

As the earnings season gains momentum, investors will be eyeing Quarterly Results to gauge the future trajectory of stock markets at the beginning of the new financial year. Armaan Madhani analyses Q4FY22 results, highlighting the hits and misses while the DSIJ Research Team decodes the sector-wise performance of the current earnings season 

The period of Q4FY22 was a turbulent roller-coaster ride, full of ups and downs for the Indian equity markets. During the January to March quarter, the markets made their way through several diverse headwinds such as the pandemic-led restrictions, the Union Budget, US Federal Reserve asserting their plans of going on a spree to hike interest rates, unprecedented geopolitical tensions between Russia and Ukraine, multi-year surge in global commodity prices, crude oil boiling to a 10-year high of USD 120 per barrel, supply chain issues, surging inflation and multiple rounds of price hikes by companies across sectors to safeguard margins. [EasyDNNnews:PaidContentStart]

As the earnings season picks up steam in this highly volatile market, investors and analysts look forward to take stock of the financial results being announced by companies for the quarter ended March 31, 2022 and decode the trends that come to light. Despite forecasts of strong margin pressures for companies across the board, analysts and investors by and large expect performance to be buoyant, which is expected to drive stockspecific action in the markets. Let us delve deeper to analyse the Q4FY22 earnings of early bird companies that have declared their results and discern the preview for companies yet to declare their results. 

Sensex Constituents’ Performance

India’s largest IT services company, Tata Consultancy Services (TCS) struck a new milestone with revenues crossing ₹ 50,000 crore for the first time. The company posted a consolidated net profit of ₹ 9,926 crore for Q4FY22, up 7 per cent from ₹ 9,246 crore a year ago. It witnessed its highest-ever order book TCV (total contract value) at USD 11.3 billion in Q4FY22 and USD 34.6 billion in FY22. However, the company’s voluntary attrition rate rose to 17.4 per cent on a trailing 12-month basis as compared to 15.3 per cent in the previous quarter. IT giant Infosys delivered its highest annual growth in a decade led by large deal momentum and differentiated cloud services. 

Its revenue from operations rose by 23 per cent to ₹ 32,276 crore in the fourth quarter as against ₹ 26,311 crore a year ago. The company’s consolidated net profit rose by 12 per cent to ₹ 5,686 crore. The company’s attrition rate zoomed to 27.7 per cent in Q4FY22, up from 25.5 per cent recorded in Q3FY22. Infosys’ results fell short of analyst estimates. Earnings were weaker than expected due to margin pressure amid rising costs and lower utilisations. As a result, several analysts have cut their margin estimates for the coming quarters. HCL Technologies bucked the weak trend and impressed investors by reporting consolidated net profits of ₹ 3,593 crore, up 226 per cent from ₹ 1,102 crore reported in the same quarter last year. 

The profit jump is due to much higher tax expenses in the base quarter. The adjusted growth in profit on an annual basis stood at 23.9 per cent. The company’s attrition rate was 21.9 per cent during the March quarter. This compares with 19.8 per cent at the end of Q3FY22 and 9.9 per cent in Q4FY21. Nestle India’s earnings were a mixed bag. Sales rose 10.24 per cent to ₹ 3,980.70 crore from ₹ 3,610.82 crore in the year-ago quarter. But high raw material costs ate into the company’s bottom-line. Net profit dipped by 1.25 per cent on an annual basis to ₹ 594.71 crore. The company’s Chairman and Managing Director Suresh Narayanan stated that the cost of key raw and packaging materials has hit a 10-year high level and that continued inflation is likely to be a key factor in the short to medium term. 

A silver lining was that the company’s e-commerce channel reported a whopping 71 per cent growth and contributed 6.3 per cent of domestic sales. Hindustan Unilever (HUL) impressed investors by reporting a strong set of numbers. Revenue during Q4FY22 came in at ₹ 13,190 crore, up 10.40 per cent from ₹ 11,947 crore registered in the year-ago quarter. Standalone net profit for the March quarter stood at ₹ 2,327 crore, up 8.58 per cent from ₹ 2,143 crore posted in the same quarter last year. The company’s volume growth was flat but it continued to grow significantly ahead of the market, gaining value and volume market shares. Its EBITDA margin during the quarter stood strong at 24.6 per cent despite high inflationary headwinds. 

Also, HUL achieved the milestone of being a company with turnover of ₹ 50,000 crore in FY22. The Q4FY22 results of HDFC Bank missed analysts’ estimates. The company reported a 22.8 per cent year-on-year rise in net profit for the March quarter at ₹ 10,055.20 crore. Profit growth topped 20 per cent for the first time since Q3FY20. Net interest income (NII) increased by 10.20 per cent to ₹ 18,872.70 crore from ₹ 17,120.20 crore in the year-ago quarter. In Q4 the company’s retail loans held a 39 per cent weightage in total loans. The share of retail loans currently stands near a 10-year low. ICICI Bank, Axis Bank and IndusInd Bank exceeded street estimates. 

Bajaj Finance reported its highest-ever consolidated net profit of ₹ 2,420 crore for the quarter ended March 31, 2022, exhibiting a robust growth of 80 per cent on a yearly basis. The net interest income (NII) in the quarter rose 30 per cent to ₹ 6,068 crore. The company's provisions declined 33 per cent on QoQ basis and 44 per cent on YoY basis to ₹ 702 crore in Q4FY22 due to improvement in asset quality. Despite a strong performance, shares of Bajaj Finance dropped by ~7.2 per cent post results as analysts remained mixed on the company’s future prospects due to the current premium valuation and elevated costs on account of expected forays into new segments. 

Winners and Losers

Mining major Vedanta achieved consolidated revenue of ₹ 39,342 crore in Q4FY22, up by 41 per cent from ₹ 27,874 crore in the quarter a year ago. The company also reported its highest ever consolidated quarterly EBITDA of ₹ 13,768 crore in Q4FY22 mainly due to higher sales volume, supportive commodity prices and operational efficiencies despite the higher cost of production amidst input commodity inflation. Consolidated net profit for the March quarter stood at ₹ 5,799 crore, down 9.84 per cent from ₹ 6,432 crore in the same quarter last year. Vedanta Group’s subsidiary, Hindustan Zinc’s revenue from operations surged 28 per cent on an annual basis to ₹ 8,613 crore during Q4FY22, led by higher zinc volumes and zinc LME prices.

Roop Bhootra CEO, Investment Services Anand Rathi Shares and Stock Brokers 

'We Continue To Remain Positive On Manufacturing Sectors" 

What is your take on the current market scenario?

Currently the markets are driven by global macro factors like higher inflation data coming from developed markets, volatile commodities prices and significant strengthening of US dollar against major currencies as we are a couple of days away from the first US Federal Reserve policy meet considering a rate hike. All these events collectively are adding to the volatility in the markets right now and should get stabilised after the first week of May post the US Federal Reserve meet outcome. 

In your view, how has the earnings’ season fared so far?

The earnings’ season has so far been moderately positive to stable, although we are into early days of the season and not many of the companies have declared their results. Broadly, we are seeing better top-line numbers form companies albeit some discretionary names have shown muted growth in volume terms. On profitability terms, the margins have come in volatile for some companies due to increase in costs while for some the cost pressures have been largely offset by inventory gains. 

Coming to the Nifty companies, only 13 companies have declared results out of 50 and seven are financials while three are IT companies largely part of the services sector. Of these, the overall top-line growth has stood at 14.1 per cent with EBITDA margins improving to 31 per cent from 26.4 per cent and PAT margins improving to 20.3 per cent from 17.7 per cent YoY. 

With inflation taking centre-stage and unprecedented volatility in Q4FY22, which sectors appear vulnerable to you from an earnings’ perspective?

Consumer discretionary sectors remain most exposed to higher inflation in raw material prices coupled with contraction in demand. 

From a long-term view, which sectors are you bullish on?

We continue to remain positive on manufacturing sectors, particularly sectors positioned around the China Plus strategy and import substitution strategy like chemicals, specialty chemicals, manufacturing, IT and technology. 

March quarter rose 18 per cent to ₹ 2,928 crore. However, Dalal Street was unimpressed and the company’s stock tanked ~7 per cent. Similarly, shares of Tata Communications plunged 10 per cent, recording its biggest fall since March 2020 after the company reported a weak set of numbers for the March quarter. Large-Cap stocks that impressed investors and analysts include Larsen and Toubro Technology Services, Tata Elxsi, ICICI Prudential Life Insurance, Mindtree, CRISIL, Schaeffler India, United Breweries, AU Small Finance Bank, Indian Hotel, Bajaj Auto, Trent, HDFC Life Insurance, HDFC Asset Management and Coromandel International. 

On the contrary, large-cap stocks that delivered poor results comprise Tata Teleservices Maharashtra (TTML), Atul, Laurus Labs and ICICI Lombard General Insurance. Mid-Cap winners this earnings season are KPIT Technologies, Mahindra CIE Automotive, Century Textiles and Industries, Cyient, Mastek, Sterling and Wilson Renewable Energy, Delta Corp, Gujarat Mineral Development Corporation (GMDC) and VST Industries. Angel One once again hit a home run, gratifying investors. Shares of the company rallied ~18 per cent to hit an all-time high of ₹ 1,991 per share on the bourses as the company experienced its best-ever quarter in Q4FY22 across operational and financial metrics. 

The company had the highest gross client addition, best quarterly orders, record-high quarterly revenue and profitability as it surpassed the nine million client mark. Its profit after tax for the March quarter increased 94.6 per cent on a YoY basis to ₹ 205 crore, driven by healthy volume growth. Mid-cap losers this season are Sundaram Fasteners, Indian Energy Exchange (IEX) and Hatsun Agro Product. Meghmani Finechem and Rajratan Global Wire were the star small-cap outperformers and stole the show by posting outstanding earnings. 

Other small-cap stock companies that brought a smile on investors’ faces with stellar results are Anand Rathi Wealth, JTL Infra, Wendt India, Den Networks, Bhansali Engineering Polymers, Mishtann Foods, IIFL Securities, Chennai Petroleum Corporation, Mahindra Lifespace Developers, Swaraj Engines and Som Distilleries and Breweries. Small-cap companies that disappointed the markets are Tata Metaliks, Tejas Networks, Rallis India, Glenmark Life Sciences, Tatva Chintan Pharma Chem, Eveready Industries, Tata Steel Long Products, Kesoram Industries, Sasken Technologies, Tata Coffee, Nelco, Apcotex Industries and Gateway Distriparks. 

Santosh Meena Head of Research Swastika Investmart Ltd. 

"We Are Extremely Positive About Economy-Facing Sectors" 

How has the earnings season been so far? Which stocks have been the hits and misses? 

The earnings season is currently in the middle phase as sectors like pharmaceuticals, infrastructure, public sector banks and capital goods are yet to present their earnings. The earnings season has been as per the street’s expectations in most of the cases so far. IT companies have witnessed pressure in terms of attrition, margins, supply and competition but the long-term demand outlook is still positive. FMCG companies have seen a lot of de-rating due to inflationary headwinds and margin pressures and most of the management commentary has been cautious regarding the medium-term cost inflation.

The biggest outperformers are banks, especially corporatefacing banks; they have performed well on all fronts like asset quality, credit growth, net interest margins and profitability. For cement companies the demand outlook is extremely positive. Most of the large players have announced capacity expansion; however, commodity inflation, especially for raw materials like coal and diesel pet coke, has deteriorated bottom-lines but it is still better than estimates in some cases. The automotive sector is also showing decent volume growth even though input cost is a major challenge. The commercial vehicle sector may show a turnaround as early indications are visible in the strong earnings of Shriram Transport Finance Limited. 

What is your outlook on the markets for FY23 and the key risks facing them? 

We are cautiously optimistic for Indian markets in FY23. Geopolitical risks, inflationary headwinds, hikes in interest rates, the possibility of a recession in Europe and USA and a slowdown in the global economic growth rate are some of the factors that are key risks for the market. The good part is that most of the risk factors are already known and the market has digested some of them without witnessing any major fall. Therefore, there is a good chance that the market may start to do well if things improve from here. If we talk about the levels for the Sensex then the downside looks limited to the level of around 53,000 while 64,000 looks a probable target on the upside. 

Which three sectors would you bet on for the long term?

We are extremely positive about economy-facing sectors like infrastructure, banking, capital goods and housing. There are strong signs of turnaround along with valuations comfort in these areas because they are coming out of a long period of pain. 

Sectoral Earnings Report 

Banking Sector

While the last couple of years might not have been good for the sector, the tide seems to be turning for the banks. The sector, which was troubled by various issues such as rising NPAs and impediments caused by the pandemic, is now in a recovery mode. As of now, only three banks have reported their Q4FY22 results. These are HDFC Bank Ltd., ICICI Bank Ltd. and AU Small Finance Bank Ltd. These banks paint a similar picture – a rise in top-line, total deposits, advances and an improvement in asset quality. As per the statement made by RBI Governor Shaktikanta Das at an event organised by the Confederation of Indian Industry, the gross non-performing assets ratio of the banking sector is at a six-year low of 6.5 per cent of the gross assets.

This is also reflected from the improvement in asset quality reported by banks in the Q4FY22 results. For example, HDFC Bank’s gross NPAs improved to 1.17 per cent of the gross advances from 1.26 per cent during the previous quarter. Similarly, ICICI Bank’s net non-performing assets (NPAs) declined 24 per cent year-on-year and 5 per cent sequentially to ₹ 6,961 crore, whereas the net NPA ratio stood at 0.76 per cent. Moreover, loan growth is expected to remain strong, led by the retail and SME segments. Taking the provisional filings into account, it is expected that banks will see on an average loan growth of 13-15 per cent.

Collections and recoveries are expected to stay strong, leading to improvement in asset quality. For instance, the average collection efficiency posted by AU Small Finance Bank in FY22 stood at 106 per cent. Its GNPA declined to 1.98 per cent from 2.6 per cent QoQ whereas the NNPA declined to 0.50 per cent from 1.29 per cent QoQ. It is expected that on an average, the NII in Q4FY22 shall grow by around 15-20 per cent YoY and 3-4 per cent sequentially. On the other hand, the net profits for the quarter are expected to rise by more than 50 per cent YoY and in the lower teens sequentially on average. 

Capital Goods Sector

A seasonally strong Q4 is yet to unravel for major capital goods companies constituting stalwarts like Larson and Toubro, Bharat Electricals, Hindustan Aeronautics and Honeywell Automation. While the order book for Q4 has been robust for Larsen and Toubro with no major impact on overseas operations (mainly Middle East and Africa), the domestic order book has been tepid. The management has retained low to mid-teen digit order inflow and revenue growth guidance for FY22, with operating margins expected to remain stable as 80 per cent of the orders have a price escalation clause. Beyond Larsen and Toubro, the market expectation is positive on the revenue side with higher realisation on account of price hike for almost all players. 

YoY growth in revenue will be visible on account of lower base. Operating margins, however, are expected to contract amid soaring commodity and oil prices and existing logistics bottlenecks that have been further aggravated by the ongoing war. Government initiatives like Production Linked Incentive (PLI) Scheme, the move towards self-reliance and increased defence spending are expected to wield robust revenue growth for defence players like Bharat Electricals, Hindustan Aeronautics and Bharat Forge with strong pipeline of projects for domestic defence procurement. 

As the war unfolds towards the end of the quarter, Hindustan Aeronautics’ Q4 results would not be impacted as Russia is a major procurement source for the company. Honeywell Automation is expected to report market-beating revenue realisations. However, operating margins will continue to be weak. That said, the company is expected to benefit from investments in oil and gas, smart cities, airports and building solutions. The sector has underperformed the benchmark as well as the broader market in the last quarter of FY 2022-23, wherein sectoral index S & P BSE Capital Goods shed 4.33 per cent from its high in January, implying a correction of 11.6 per cent, as compared to BSE Sensex which gained 0.54 per cent while BSE 500 lost 0.49 per cent during the same quarter.

Automotive Sector

Q4FY22 was a medley for the Indian automotive sector. The industry which has been on a path of revival was confronted by fresh hurdles caused by the unprecedented surge in commodities and oil prices along with lockdowns in the principal cities of China. The Russia-Ukraine crisis further aggravated the semiconductor shortage as Russia happens to be one of the largest producers of palladium while Ukraine is one of the biggest producers and exporters of neon gas. Both of these are instrumental in the manufacturing of semiconductors. Quarterly domestic sales numbers exhibit that Q4 passenger vehicle (PV) sales slipped by 1.38 per cent on a YoY basis while commercial vehicles (CV) sales witnessed a healthy growth of 18.75 per cent. 

Two-wheelers suffered the adverse impact of the headwinds as sales during the March quarter nose-dived by 23.04 per cent on a YoY basis. India’s leading two and three-wheeler maker, Bajaj Auto reported a 10.3 per cent increase in its standalone profit after tax for Q4FY22 to ₹ 1,469 crore as against ₹ 1,332 crore reported in the same quarter a year ago. Revenues for the March quarter came in at ₹ 7,975 crore, declining by 7.2 per cent on a YoY basis. On a sequential basis, the company’s EBITDA margin improved significantly from 15.6 per cent in Q3FY22 to 17.5 per cent in Q4FY22, largely driven by the positive impact of price increase, deferral of material cost increase, improved US dollar realisation and favourable sales mix. 

However, severe supply chain challenges continued to persist for the company during the quarter. Historically, automobile companies have borne the biggest brunt of supply chain snags coupled with inflation. Despite regular price hikes, high input cost inflation is expected to impair margins of automakers to some extent. Domestic consumption in India has faced multiple headwinds which has put a drag on demand. There was also a further jump in commodity costs in March. Hence, the full impact of the same will be visible only in Q1FY23. 

During this earnings season, investors should watch out for management commentary of automotive manufacturers with respect to potential future price hikes and demand outlook.

Information Technology Sector

The IT sector has been one of the most rewarding sectors for investors since 2020. Digitisation had been the ‘mantra’ during and post-pandemic times which had led to significant earnings’ growth for IT companies, as reflected in rising stock prices. However, as we move into FY23, market experts are not finding the IT space as attractive as before. Investors are concerned about rising attrition rate and the cost of backfilling attrition, along with aggressive new hiring and wage hikes that are putting more pressure on margins. The BSE IT index underperformed broader markets in April as it declined by nearly 11.2 per cent. 

The largest IT company and second-largest company of India by market cap, TCS has reported robust Q4FY22 results. The company posted industry-leading operating profit margin of 25 per cent which was almost same as in the previous quarter. For FY22, it witnessed 15.4 per cent constant currency revenue growth and 14.8 per cent growth in net income. Investors were quite disappointed with the Q4 results of Infosys, India’s second-largest IT company as per market capitalisation. 

The company’s operating profit increased 8 per cent as against Q4FY21 but decreased by 7 per cent in comparison to the previous quarter. It suffered margin contraction of 300 basis points on a YoY basis to 21.5 per cent. For FY22, Infosys witnessed 21 per cent constant currency revenue growth and 14.3 per cent growth in net income. The stock has fallen by ~17 per cent in April. IT stocks have been under pressure largely since the beginning of 2022 due to contraction in demand amid macro headwinds in western countries, high attrition rates, supply side pressures and steep valuations. Many mid-cap IT companies are yet report their results for the quarter ended March 31, 2022 and investors should be keep an eye out for emerging trends that become evident. 

Conclusion

The ongoing geopolitical tensions among Russia and Ukraine, recent lockdowns in China due to resurgence in corona virus cases, aggressive monetary policy tightening by central banks of major world economies, multi-year high inflation levels in various countries, wild swings in crude oil and other commodities as well as mixed quarterly results have kept global equity markets on edge during April 2022. Year to date, US frontline benchmark indices Dow Jones and S and P 500 have delivered negative returns of ~9 per cent and ~13 per cent, respectively. Inflation is sprinting at a blistering speed in the US.

As per recent data, inflation in the US has catapulted 8.4 per cent, recording a four-decade year high over the year to the end of March. The US Consumer Price Index (CPI) soared by 1.2 per cent in March. This increase happens to be the highest month-to-month jump since 2005. The war between Russia and Ukraine has driven up energy costs in America which has been the key driver of high inflation rates. As a consequence, the consumer confidence in the country eased in April. The Conference Board’s Index dipped to 107.3 from the marginally upwardly revised 107.6 reading in March. 

Since the 10-year high of USD 120 per barrel prices of crude oil recorded in early March, the price of black gold recently dropped below the USD 100 per barrel mark, mainly on account of prolonged lockdowns in the key cities of China which might help ease the global oil demand crunch. To quote from an article in ‘Fortune’ that puts forth another valid perspective: “Oil has also weakened on the prospect of higher US’ interest rates. A strong US dollar makes dollar-priced commodities like oil more expensive for other currency holders and increases risk aversion among investors.” Other factors at play include the ongoing war in Ukraine and surging commodity prices which are expected shrink oil demand. 

Meanwhile, India’s retail inflation jumped to a 17-month high of 6.95 per cent in March from 6.07 per cent in February. This is the third consecutive month in which inflation has come in above the Reserve Bank of India’s mandated 6 per cent upper bound. The acute rise in inflation was primarily driven by an increase in prices across almost all major groups of the basket, except the index of the housing component which declined on a month-on-month basis. This trend is indicative of the strong build-up in price pressures across the board. 

Reserve Bank of India’s Monetary Policy Committee (MPC) in its latest meeting voted unanimously to keep the policy repo rate unchanged at 4 per cent and decided to retain an ‘accommodative’ stance. The committee will, however, focus on withdrawal of accommodation to make sure that inflation continues to remain within their target range, while simultaneously supporting growth. In light of the volatile external environment due to the geopolitical situation in East Europe, the RBI revised its inflation projection upwards to 5.7 per cent from the earlier 4.5 per cent and also lowered GDP projection to 7.2 per cent as against 7.8 per cent estimated earlier. 

Despite the weak global cues and high volatility that prevailed in April coupled with upward revision inflation expectations and cut down in growth forecasts, the Indian equity markets have been resilient and performed well relative to global peers. Year to date headline indices Nifty 50 and Sensex have slipped by ~3 per cent each. India’s industrial growth, as per the Index of Industrial Production (IIP), grew to 1.7 per cent in February from 1.5 per cent in January. The output of India’s eight core sectors increased by 5.8 per cent on a year-on-year basis in February, up from 4 per cent recorded in January. Over the last one year, Nifty Bank index has significantly underperformed broader markets by registering gains of ~7 per cent relative to Nifty 50 which has escalated ~15 per cent. Financial services account for 35.17 per cent and 29.71 per cent weightage in Nifty 50 and Sensex. Hence, the sector’s earnings and management outlook will play a pivotal role in plotting the future path of these benchmark indices. The central bank has set the stage for interest rate hikes in the coming months. This works in favour of well-capitalised financial institutions with robust credit portfolios as a rise in benchmark policy rates leads to increase in loans rates which provide a fillip to interest margins. 

The early bird results for Q4FY22 indicate a deceleration in corporate sector growth in the upcoming quarters. A poor start to the earnings season by IT incumbents reporting substandard results and mixed results by the big private banks such as HDFC Bank has led to heavy selling by FIIs in these index heavyweights. Initial results from companies indicate that rising cost pressure will be the key theme during this earnings season. After consecutive earnings upgrades over the last few quarters, higher costs and ailing demand could to lead to cuts in FY23-24 estimates and possible downgrades for some companies operating in sectors such as consumer staples, building materials, cement, automotive ancillaries and oil marketing companies. 

This could be an opportunity for investors to review their portfolio to factor in high levels of inflation and volatility which are expected to persist in the coming quarters. Typically, rising inflation leads to lower consumption and affects majority of the sectors with regard to revenues and margins. Sectors such as banks, metals, energy, real estate and defence which are not likely to see much of an impact on their earnings’ estimates due to inflation could outperform. Investors should stay focused on market leaders with formidable pricing power, established brands, robust balance-sheet and high free cash flow generation. That is because such companies possess the distinctive ability to pass on the rise in input cost to clients during inflationary phases.

[EasyDNNnews:PaidContentEnd] [EasyDNNnews:UnPaidContentStart]

[EasyDNNnews:UnPaidContentEnd]