The better-than-expected September quarter earnings provided strong support to the market. Also the expectations increased for strong double-digit returns in FY22 though obviously on a low base of FY21.
"Corporate earnings in Q2FY21 came in better-than-expected wherein companies benefitted from low raw material cost and realised operating leverage benefits with management commentary positive on pace of demand recovery and retaining some part of operating leverage gains in the post COVID world," ICICI Direct said.
At the index level, excluding the BFSI space, net sales fell around 10 percent YoY, primarily driven by double-digit topline decline in the oil & gas space. On the profitability front, EBITDA margins at the index level came in at a multi-quarter high at 18.9 percent, up 410 bps YoY, while at the PAT level, growth was limited to just around 2 percent YoY due to exceptional low tax rate in the base quarter (around 11 percent in Q2FY20) amid change in corporate tax rate regime last year, the brokerage added.
It feels profit before tax is more realistic to look at in Q2FY21, wherein profitability growth came in pretty strong at around 31 percent YoY, which was also supported by higher other income, primarily factoring in gain on sale of one business segment at an engineering conglomerate.
With the support from earnings and other factors including gradual economic recovery, strong FII inflow and vaccine progress, the benchmark indices not only recovered their pre-COVID gains, but also climbed new record high of 13,000 on the Nifty and 44,500 on the Sensex.
Post Q2FY21, ICICI Direct marginally revised its FY21-22 estimates and introduce FY23 estimated numbers. Going forward, it expects Nifty earnings to grow at 17.5 percent CAGR in FY20-23.
From the low base of FY21, Nifty earnings CAGR is estimated at 22.7 percent in FY21-23, said the brokerage which has now valued Nifty at 13,350 i.e. 20x P/E on FY22-23 expected average EPS of Rs 668 with corresponding Sensex target at 45,500.
Here are five companies that positively surprised with Q2FY21 earnings, according to ICICI Direct
Divis Laboratories: Buy | Target: Rs 4,205 | Potential Upside: 18.6 Percent
Divis's Q2 revenues grew 21.0 percent YoY to Rs 1,749 crore. In Q2, generic segment grew 25.9 percent YoY, custom synthesis grew 18.1 percent YoY while carotenoids grew 9.9 percent YoY. EBITDA margins rose 843 bps YoY to 42.4 percent due to significantly better gross margin performance, lower other expenditure. Hence, EBITDA grew 51.1 percent YoY while PAT grew 45.6 percent YoY in Q2FY21. More than a strong performance, important narrative for Divis is unprecedented capex to further augment capacity besides preparing for growing opportunities arising from China plus one factor.
It has earmarked an aggressive capex of around Rs 2,800 crore, over and above around Rs 2,000 crore spent in last five years. Impact of this massive investment is already visible and is expected to reflect in FY21-22. Divis stays a quintessential play on the Indian API/CRAMs segment with its product offerings and execution prowess. We maintain buy with target of Rs 4,205 based on 38x FY23E EPS of Rs 110.6.
Elgi Equipments: Buy | Target: Rs 140 | Potential Upside: 9.5 Percent
Elgi Equipments reported a strong Q2FY21 with consolidated revenue up 8 percent YoY to Rs 480.3 crore. Standalone revenue (domestic & direct exports compressor) de-grew 3 percent YoY to Rs 263.2 crore (around 55 percent of consolidated topline) while international compressor business posted robust growth of 43.8 percent YoY (contributing around 38 percent of consolidated topline), the automotive segment revenue declined 23.8 percent YoY (around 7 percent of firm's topline). EBITDA margins improved significantly by 630 bps YoY to 13.8 percent in Q2FY21 primarily due to better revenue booking and significant reduction in operating expenses.
Going ahead, further traction in international market, new products like oil free compressors (AB series) would aid growth while green shoots of revival visible in India business would further aid topline. Also, its strategy on cost reduction, focus on cash business would help deal with working capital, debt reduction and liquidity situation. Going forward, we expect revenue, EBITDA growth of 7.9 percent, 37 percent, CAGR, respectively, in FY20-22E. We value the company at Rs 140 (32x FY22 EPS of Rs 4.4) with a buy rating on the stock.
Firstsource Solutions: Buy | Target: Rs 84 | Potential Upside: 10.4 Percent
Firstsource Solution (FSL) reported healthy Q2FY21 results. Dollar revenues increased 13.6 percent QoQ led by healthy growth in top client, 15 percent QoQ growth in BFS, 31.8 percent QoQ growth in communication, media and technology (CMT). In rupee terms, revenues increased 20.6 percent YoY, 11.8 percent QoQ. EBITDA margins increased 10 bps QoQ to 15.8 percent. Short-term debt fell from Rs 834. 1 crore to Rs 588.5 crore. The robust growth in current quarter and improving growth in subsequent quarters prompted FSL to up its revenue guidance to 9-12 percent YoY growth from earlier guidance of 6-10 percent in FY21E revenues in constant currency terms
From a long term perspective, we believe increased contribution from top client, healthy deal pipeline & outlook in mortgage business and traction in payer business will drive revenues. Also, the strategy of increased penetration in technology segment, cross-selling of platforms business, hiring of leaders to boost its digital business would further drive long term revenues. This, coupled with upward revision in EPS estimate and expected debt reduction, prompt us to remain positive on the stock.
Minda Industries: Buy | Target: Rs 410 | Potential Upside: 12.3 Percent
Minda Industries' (MIL) Q2FY21 results were healthy, with the company continuing its path of significant outperformance vis-a-vis base user industries. Consolidated revenues rose 7.8 percent YoY to Rs 1,465 crore versus around 5 percent OEM sales decline. Accompanying margins rose to multi-year high of 14.7 percent tracking operating leverage benefits along with around 62 percent rise in PAT to Rs 80 crore. Going forward, we expect continued sequential improvement in production levels at 2-W & P V OEMs in H2FY21E, which augurs well for MIL (2-W, P V form around 50 percent each of revenues; OEMs form around 86 percent of overall channel mix).
The company continues to offer a viable play on vehicular premiumisation, with product portfolio and client base set to be augmented further once merger with Harita Seating Systems goes through. We build 11 percent sales CAGR, 39 percent PAT CAGR over FY20-23E along with increase in margins to 13.5 percent by that time riding on better product mix and cost actions. We assign buy rating to MIL, valuing it at Rs 410 i.e. 32x P/E on FY22E & FY23E average EPS of Rs 12.8.
Tata Steel: Buy | Target: Rs 625 | Potential Upside: 15.2 Percent
Tata Steel reported a healthy Q2FY21 performance wherein performance of both Indian, European operation was better than our estimates. Standalone operations reported EBITDA/tonne of Rs 12,861 per tonne (up 15 percent YoY, 117 percent QoQ), while European operations reported negative EBITDA/tonne of $27 per tonne. Going forward, for Indian operation, on the back of a series of price hikes, coupled with improvement in product mix, blended realisation for Q3FY21 is likely to be higher by Rs 4,000-5,000 per tonne QoQ (compared to Q2FY21). Also, coking coal prices for Indian operations are expected to be lower by $5-10 per tonne QoQ. For European operations also EBITDA/tonne is likely to improve in Q3FY21 (from Q2FY21 levels) on the back of increase in gross spreads.
Tata Steel has also entered into negotiation with SSAB, a Swedish company, to sell its Netherland business including Ijmuiden steelworks (six to nine months needed to be completed, if the potential transaction happens).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.