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Momentum of Q3 FY21 maintained in Q4 so far, but downgrades outpace upgrades

The 78 Motilal Oswal Universe and 27 Nifty50 companies have announced their results as of May 10, 2021. Companies that have reported earnings thus far comprise 53 percent of India's market capitalisation, and 75 percent of the Nifty50 index weight, said Motilal Oswal.

May 12, 2021 / 10:52 AM IST

We are in the midst of the March 2021 quarter earnings (Q4 Fy21) season and so far, corporate quarterly scorecard data indicated that the Q4 has maintained its momentum of Q3 FY21 but this time, downgrades outpaced upgrades after strong upgrades in the previous two quarters. Also, the commentary from managements seems cautious given the lockdown like restrictions since April and strict lockdowns in some states in May to control the spread of virus.

India reported more than 4 lakh cases on daily basis last week, though the graph moved southwards this week with over 3.29 lakh cases seen on Monday. Most worried part this time in the second COVID wave is that the virus has been spreading in the rural areas which was not the case in first COVID wave, experts feel.

As a result, the brokerages not only lowered their earnings estimates but also economic projections for FY22, given the pressure and impact of COVID so far in Q1FY22.

"The advent of the second COVID wave has muddied sentiment and impaired the FY22 earnings visibility. With multiple states entering into extended lockdowns and restrictions, we see downside risks to our FY22 earnings estimates," Motilal Oswal said in its Q4FY21 interim earnings review note.

The brokerage further said, "Q4FY21 earnings are progressing largely in line with our expectations but management commentaries in BFSI/Consumer/Auto have turned cautious even as it remained upbeat in IT and Metals. The interplay of the resurgence in COVID cases and the pace of vaccination would decide the trajectory of economic recovery going forward."


"The Nifty now trades at 12-month forward P/E of 19.4x, around 3 percent above its historical average of 18.8x. At 2.9x, Nifty P/B is well above its historical average of 2.6x," the brokerage added.

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Overall the market has been rangebound for nearly three months now given the COVID situation, after falling sharply from its record high levels in February. The Nifty50, at current levels, traded around 4 percent below its all-time high.

The 78 Motilal Oswal Universe and 27 Nifty50 companies have announced their results as of May 10th, 2021. Companies that have reported earnings thus far comprise 53 percent of India's market capitalisation, and 75 percent of the Nifty50 index weight, said Motilal Oswal.

The brokerage further said the Q4FY21 earnings season has maintained the momentum of the Q3FY21 results season. "Nifty profits for the 27 companies that have posted their results have grown 50 percent YoY (versus expectations of 49 percent growth). On the other hand, for the 78 companies in the MOFSL Universe, profit growth stood at 47 percent YoY (versus expectations of 51 percent growth)," it explained.

Overall Q4FY21 was another strong quarter, aided by the deflated base of Q4FY20 and healthy demand recovery for the large part of Q4FY21 – as attested by high-frequency indicators, said the brokerage.

In the year-ago quarter (Q4FY20), the country had announced nationwide lockdown from around last 10 days of March 2020, which largely impacted earnings as well as economic growth of the country in Q4 last year.

Key drivers of the Q4FY21 performance were metals, private banks & NBFCs, and IT companies.

"In metals, only Tata Steel and Hindustan Zinc has thus far reported results among the steel/non-ferrous companies. As expected,

Tata Steel reported strong margins in India Steel operations," said Motilal Oswal.

The brokerage further said in private banks and NBFCs, the healthy performance was attributable to moderation in slippages and improved disbursements / collection efficiency. "However managements sounded cautious about collection efficiencies/asset quality ahead.

The IT sector has continued to post strong performance, with robust deal wins and orderbook, the brokerage added.

But, Motilal Oswal said the earnings upgrade/downgrade ratio for Q4FY21 was skewed in favour of downgrades. "31 MOFSL Universe companies have reported downgrades of more than 5 percent (of which 17 companies have seen downgrades of more than 10 percent), while 15 have posted upgrades of more than 5 percent," it explained.

Within the MOFSL Universe, at the sector level, "only Metals, NBFCs and Cement have seen earnings upgrades of 74 percent, 3 percent and 2 percent, respectively. On the contrary, Technology, Consumer and Automobiles have seen earnings downgrades," said the brokerage.

Among the Nifty constituents, Motilal Oswal said, "Axis Bank, SBI Life Insurance, HUL, Hero MotoCorp, and Reliance Industries have exceeded our profit estimates. On the flip side, Tata Consumer, Maruti Suzuki, Britannia Industries, HCL Technologies and Kotak Mahindra Bank have missed our expectations."

After the so far March quarter earnings season, the brokerage is overweight on BFSI, IT, Metals and Cement; neutral on Consumer, Healthcare, Auto, Telecom, and underweight on Oil & Gas, and Infrastructure.

Overall experts feel the Q1FY22 earnings season could be hit by the COVID-19 and as a result, they started lowering earnings expectations for full year FY22.

"Control of the second wave is key to sustaining strong corporate performance in the coming quarters. While base in Q1 is low, we have high base quarters of Q3 and Q4, so the pandemic has to come under control and normalcy has to return," Amnish Aggarwal, Head – Research, Institutional Equities at Prabhudas Lilladher told Moneycontrol.

He believes ‘Out of Home’ and discretionary segments could come under pressure in the coming 1-2 quarters as top 10 cities are nearly 40 percent of India's consumption and they seem to be facing the brunt of COVID-19.

Ambareesh Baliga said the 1st quarter of FY22 could be a wash-out, but may not be as bad as FY21. "I will surely be reducing the earnings estimates for FY22, however would wait for the rest of the earnings for Q4FY21 to be declared."

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

Disclaimer: MoneyControl is a part of the Network18 group. Network18 is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.
Sunil Shankar Matkar
first published: May 12, 2021 10:52 am

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