Earnings estimates of India Inc see upgrade after strong Q3 results

Analysts at top brokerages raise FY21-FY23 estimates by 5-6%

After a better-than-expected show by India Inc in the December 2020 quarter, there is more good news for investors and market participants.

Even as corporate profits were already expected to grow at a robust pace in FY22 and FY23, the country’s top brokerages have now upgraded the earnings per share (EPS) estimates of big listed companies for FY21-FY23.

The quarterly net profit of the BSE200 companies reached a record high of Rs 1.67 trillion in the third quarter, and was up 57 per cent year-on-year. With this, India Inc has recovered most of the losses suffered during the March 2020 and June 2020 quarters due to the Covid-19-led lockdowns.

The combined net profit of the BSE200 companies on a trailing 12-months basis (TTM) was Rs 3.67 trillion at the end of the December 2020 quarter, just 2.1 per cent lower than the TTM net profit of Rs 3.75 trillion at the end of the December 2019 quarter. Together, the BSE200 companies account for 84 per cent of the total market capitalisation of all listed companies.

Importantly, the recovery in earnings is also broad-based with three out of every four companies in the BSE200 index reporting a year-on-year (YoY) improvement in net profit in the December 2020 quarter. In all, 138 out of 180 companies (constant sample where data of past five years is available) in the index reported an increase in earnings in the third quarter over the same period last year —  the highest in the last 10 quarters.

For comparison, 104 companies had reported improvement in earnings in Q2'FY21, while the number for the December 2019 quarter was 125. The number was highest in June 2018 quarter (Q1 FY19) when 141 out of 180 BSE200 companies had reported YoY growth in earnings.

This, analysts in top brokerages believe, make the earnings growth sustainable leading to upgrade for a majority of the companies.

"Despite rising expectations, the third quarter results were strong compared to previous estimates. Consensus now expects 14 per cent growth in FY21 Nifty EPS against earlier expectation of 5 per cent growth. FY22 and FY23 EPS estimates have been upgraded by 6 per cent since September 2020, led by metals, information technology, private banks, non-banking finance companies and autos," Credit Suisse analysts led by Neelkanth Mishra wrote in their Q3'FY21 earnings review.

The sentiment is similar at Motilal Oswal Securities."Sharp demand recovery was seen during the festive season coupled with continued cost-saving initiatives. This has resulted in the second consecutive quarter of material upgrades for Nifty EPS. The underlying recovery, more importantly, has led to a broad-basing of growth," analysts at Motilal Oswal Securities said. 

They added that the performance, while broad-based, was led by cyclical sectors such as metals, autos and cement.

The brokerage has upgraded Nifty EPS for FY21 by 5 per cent compared to its earlier estimates.

With this, the street expects Nifty companies to close FY21 with an EPS of around Rs 420, up nearly 15 per cent from the current figure of Rs 366 and down just 5 per cent from March'20 EPS of Rs 444.

For comparison, Nifty EPS had declined to a low of Rs 344 at the end of June'20 quarter earnings season.

The only risk to this bullish outlook is that most of the incremental rise in earnings growth has been accounted for by a handful of companies in cyclical sectors while the core earnings – accounted for by IT, FMCG, pharma, utilities, private sector banks and oil & gas – have been growing at the past steady state.

"Cyclical sectors – such as metals, autos, oil & gas and cement – accounted for three-fourths of the incremental profit after tax for our coverage universe," say analysts at Motilal Oswal Securities.

Then companies also saved on costs many of which appear unsustainable. As a result, some moderation is expected in margins, after the surge seen in the December 2020 quarter. However, part of this moderation in margins is already factored into the brokerage estimates of earnings.

"Higher metal prices, telecom ARPUs, cost control in sectors like cement and energy, and lower promotion expense in consumer and pharma helped; but several, if not most, of these costs are likely to return (to normalised levels)," Credit Suisse said.

Lastly, the recovery in revenue growth has been less than stellar with 127 firms reporting a lower YoY improvement in Q3'FY21, as compared to the trend seen about two years ago.

The BSE 200 companies’ combined revenues were up by just 4.2 per cent YoY in Q3'FY21, which was much lower than what was seen prior to the June 2019 quarter (quarterly growth of 10 – 20 per cent). This, some analysts say, calls for some caution while extrapolating the third quarter earnings forward.