Corporate earnings rebound in December quarter fails to lift Nifty EPS

Corporate results for the December quarter (Q3) have, so far, surpassed expectations with many big companies reporting high double-digit growth in earnings. 

This buoyancy has, however, done little to lift the underlying earnings per share (EPS) of the benchmark indices or lower their valuation. 

The trailing 12-month EPS of the Nifty50 has risen just 2.8 per cent sequentially during the quarter.  Further, earnings are still down 14.5 per cent year-on-year (YoY). The index closed on Thursday with trailing EPS of Rs 373.9, compared to Rs 363.7 as of end-September. The Nifty EPS stood at Rs 437 a year ago. 

As a result, Nifty remains expensive compared to its historical valuation. The index closed on Thursday with a P/E multiple of 37x, down from its peak valuation of 40x but still 70 per cent higher than its historical average (see chart).

Of the 50 index firms, 17 have declared their Q3FY21 results, including top firms in terms of net profit and market cap, such as Reliance Industries, Tata Consultancy Services, HDFC Bank and Infosys. Together, these 17 account for 62 per cent of the combined market capitalisation of all Nifty50 firms.

In all, 309 firms have declared their Q3 results. The combined net profit of these early birds doubled YoY to Rs 81,703 crore in Q3FY21, from Rs 40,896 crore a year ago. Their earnings were up 57 per cent sequentially compared to the September 20 quarter.

The combined revenues for these firms were up 4.9 per cent YoY in Q3FY21. In comparison, the combined net profit of the 17 Nifty firms in the early bird sample rose 18.9 per cent YoY in Q3FY21, while revenues fell 1 per cent YoY.

Analysts attribute the dichotomy between overall earnings growth and Nifty EPS to the tilt in earnings growth in favour of select banks and commodity producers. 

“The biggest rise in earnings has been reported by companies such as YES Bank, Bank of Baroda, JSW Steel, Jindal Steel & Power, and UltraTech Cement. Only two of these are in the index, with relatively low weight. This limits their influence on Nifty overall earnings,” says G Chokkalingam, founder and MD of Equinomics Research & Advisory Services. 

For example, YES Bank alone accounts for 46 per cent of the incremental growth in early birds during the third quarter. 

The bank reported a nearly Rs 19,000-crore positive swing in net profit to Rs 151 crore in Q3FY21, from an Rs 18,560-crore loss in Q3FY20. 

Excluding YES Bank, the overall growth in earnings declines to 37 per cent on a YoY basis.  Another one-fifth of the incremental growth in earnings was accounted for by metal and cement companies such as JSW Steel, JSPL, Tata Steel BSL, Hindustan Zinc and UltraTech Cement.

Bank of Baroda was another top contributor to incremental growth. It reported net profit of Rs 1,061 crore in Q3FY21 against a loss of Rs 1,407 crore a year ago.

The index is, however, dominated by companies such as Reliance Industries, Tata Consultancy Services, Infosys, HDFC Bank, and HDFC Ltd, which have reported far modest growth on the earnings during the third quarter. 

Analysts expect commodity producers to report strong earnings growth for at least three more quarters, due to the sharp rise in metal and cement prices on a YoY basis, and the very low base of last year. This, however, may have only limited impact on Nifty’s overall earnings. 

Others are, however, more bullish. “There has been a strong revival in earnings across sectors and the momentum is expected to continue in the next financial year. Overall, I expect 30-35 per cent growth in Nifty50 earnings in FY22, followed by 15 per cent growth in FY23,” says Dhananjay Sinha, head (research), Systematix Institutional Equity.

This, he expects, will continue to provide support to the rally in the broader market.