Covid second wave unlikely to dent FY22 earnings, say analysts

Despite the sharp rise in Covid cases and the ensuing lockdown imposed across key cities across India that can dent the economic momentum, analysts remain optimistic on the earnings trajectory of India Inc and have not yet downgraded / cut projections for fiscal 2021-22 (FY22). 

“Corporate earnings are yet to come back to their pre-Covid levels in realistic terms even though they may look optically higher due to the low base effect of the last year. Despite the recent lockdown measures, the companies engaged in essential services continue to run. The curbs can, at best, slow the earnings growth for a couple of months. I do not see any major impact on FY22 numbers at an aggregate level as of now,” says G Chokkalingam, founder and chief investment officer at Equinomics Research.

As regards the economy, while Nomura has slashed India's FY22 gross domestic growth (GDP) projection to 12.6 per cent (13.5 per cent earlier) in the backdrop of rising Covid cases, those at JP Morgan, UBS and Citi now expect FY22 GDP growth to range between 10 - 12 per cent (11-13 per cent forecasted earlier). 

Though the economic impact of the recent mobility curbs, analysts say, will only intensify over the next few weeks, there is light at the end of the tunnel. The key risk, however, is that the drag in mobility widens to impact the broader economy. Those at Nomura, for instance, expect the impact to be short-term (1-3 months) and less severe (than in Q2-2020), due to a more pandemic-adept economy. 

“Overall, we expect a loss of sequential momentum in Q2-2021, but once the second wave passes (we assume July-September), it should result in a release of pent-up demand in the subsequent quarters," wrote Sonal Varma, managing director and chief India economist at Nomura, in a recent co-authored note with Aurodeep Nandi.

Corporate earnings in this backdrop, according to A K Prabhakar, head of research at IDBI Capital, will remain polarised. While there will be some sectors (such as entertainment, hotels, aviation etc.) that will bear the brunt of the second Covid wave, the loss will be compensated by strong earnings in some other sectors, he says.

"Covid second wave is unlikely to derail FY22 earnings at an aggregate level. The loss of earnings in the impacted sectors will be compensated by the healthy growth in earnings of pharma, information technology (IT), telecom, chemicals and metal sectors. FMCG (packaged foods segment) should also do well in the lockdown times. Agri-related plays are another sector that should do well," Prabhakar says.

That apart, the economy, analysts believe, should benefit from faster vaccinations, the lagged impact of easy financial conditions, front-loaded fiscal activism and strong global growth. All this should see Corporate India bounce back faster-than-expected in the second half of FY22. 

Those at Prabhudas Lilladher, however, remain cautious in the short-term. The emerging Covid situation, they believe, can result in incremental earnings per share (EPS) cut for FY22 in the coming months, although it seems too difficult to extrapolate the same to FY23.

“Q1-FY22 presents a challenge given expected lockdowns due to second wave of Covid. However, long-term trends in infra, housing, IT services, pharma, chemicals, BFSI, agri and e-commerce are intact. NIFTY earnings have been cut by 0.5 per cent, 1.2 per cent and 0.8 per cent for FY21/22/23 even as consensus estimates have been cut by 1.7 / 1.7 / 1.1 per cent. Our Nifty estimates are higher than consensus by 3.8 / 1.9 /1.5 per cent. NIFTY EPS cut is mainly in auto, banking and pharma,” says Amnish Aggarwal, head of research at Prabhudas Lilladher.