Q1FY22 earnings review: These 6 sectors may lead growth; a list of stocks that are worth a look

A low base of Q1FY21 and localised lockdowns following the furious second COVID-19 wave saved the June quarter earnings of India Inc.

There was hope that the low base of the year-ago quarter would give a healthy bump to earnings on a yearly basis but there were apprehensions, too, that the second wave could derail growth.

Sequentially, the numbers were weak but overall, they were largely in line with expectations—a mix of hits and misses. As the brokerage firm Motilal Oswal Financial Services said of the Nifty constituents, 42 percent beat their PAT estimates, while 34 percent missed expectations.

IT, metals steal the show, financials falter

The IT and metal sectors hogged the limelight in the earnings season. From robust revenue growth to a bright growth outlook, the sector gave a strong boost to the market sentiment.

"Q1FY22 marks the fourth quarter of robust quarter-on-quarter (QoQ) revenue growth; 8 of 13 companies have beaten our earnings expectations," Motilal Oswal said.

The metal sector saw the highest ever quarterly earnings of Rs 33,700 crore and contributed to 45 percent of incremental PAT, aided by strong price realisation in the domestic and export markets, it said.

The oil & gas sector also reported healthy numbers, barring a few.

"Led by OMCs (oil marketing companies), the segment has posted a better-than-expected performance from the marketing segment. As many as 11 out of 15 companies beat PAT estimates," Motilal Oswal said.

Higher raw material prices dented the gross margins of the consumer-sector companies but the lower base of the previous year and buoyancy in rural and urban demand rescued them.

"As many as 16 out of 18 companies from the consumer sector posted double-digit sales growth," Motilal Oswal said.

The misses were mostly in the financial space. Most private banks reported fresh slippage from the retail segment, though the impact on asset quality was less severe than during the first wave, Motilal Oswal said out.

Non-banking financial companies (NBFCs) reported below expectations result as restrictions of movement  hit collections and disbursements, leading to stress building up across segments.

Sectors like cement, specialty chemicals, consumer durables (largely Havells), and oil and gas beat estimates.

The healthcare sector reported a PAT growth of 18 percent YoY, which was in line with estimates. On the other hand, auto, capital goods and telecom reported below estimates results, the brokerage said.

The outlook

The Q1FY22 earnings were led by cyclicals such as metals, cement and oil & gas. These sectors, along with the IT, BFSI and pharma sectors, may continue to see growth as economic activities pick pace and COVID-19 comes under control due to widespread vaccination.

"FY22 earnings growth is estimated to be led by (a) metals, which continue to benefit from strong price realisations, (b) BFSI which is expected to benefit from economic recovery as demand revives, and (c) strong
earnings growth in export-oriented sectors such as technology and the healthcare," said Motilal Oswal.

Management commentaries of most sectors hint at an improved demand environment due to the easing of restrictions, fewer active COVID-19 cases and a pickup in the vaccination drive.

But there are concerns such as Nifty's rich valuations and heightened activity in the primary market.

"There is an elevated activity in the primary market and Nifty's valuations at 21 times 12-month forward EPS is rich, so consistent delivery on earnings expectations going ahead become crucial," Motilal Oswal said.

The brokerage firm is “overweight” on BFSI, IT, metals, cement and capital goods and “neutral” on consumer, auto and healthcare sectors. It is “underweight” on the telecom, energy and utility sectors.

Motilal Oswal expects Nifty EPS to grow 35 percent and 18 percent YoY in FY22 and FY23.

Brokerage firm ICICI Direct expects Nifty EPS to grow at 24.2 percent CAGR in FY21-23E.

Shopping list 

ICICI Direct recommends buying Divi's Laboratories (target price Rs 5,815), JSW Steel (target price Rs 850), KPR Mills (target price Rs 2,310), Mahindra & Mahindra (target price Rs 1,000), Matrimony (target price Rs
1,350) and SBI (target price Rs 540).

Infosys, Hindustan Unilever, ICICI Bank, SBI, HCL Technologies, UltraTech Cement, Titan, Divi's Labs, Hindalco and SBI Card are the preferred largecap ideas of Motilal Oswal.

Cholamandalam Investment and Finance Company, L&T Technology, Max Financial, Deepak Nitrite, JK Cements, Indian Hotels, Aditya Birla Fashion, Zensar Tech, Orient Electric and Solara Active Pharma are the top midcap picks of Motilal Oswal.

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