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India Equity Strategy - Quarterly flipbook: Q4 - a strong end to FY21 - HDFC Securities

Posted On: 2021-07-06 22:03:56 (Time Zone: IST)


Mr. Varun Lohchab, Institutional Research Analyst, HDFC Securities and Mr. Punit Bahlani, Institutional Research Analyst, HDFC Securities.

Q4FY21 earnings season ended a volatile year on a high note with +3.2%/+9.9% aggregate EBITDA/PAT beat across the HSIE coverage universe (~190 stocks), while aggregate revenues were largely in line vs estimates. PAT beat was largely led by energy, chemicals, cement and non-lending BFSI (insurance and capital markets) sectors while autos and real estate sectors delivered a miss.

Like in Q2 and Q3, in Q4 as well, ~60% of our coverage stocks have beaten estimates. Despite a muted outlook for 1HFY22 amidst the second wave of COVID, earning estimates for FY22/FY23 were upgraded by +3.7%/+4.7% for the HSIE coverage universe. Earning upgrades were led by the energy and chemicals sector. For the HSIE coverage universe, FY22/FY23 earnings growth stands at 21/20%, post 34% YoY earnings growth in FY21, leading to doubling of earnings over FY20-23.

Despite a strong second COVID wave, Nifty consensus of FY22 EPS remains largely unchanged because the impacted sectors have a low weight in aggregate earnings; this would not change unless banks see a material cut in earnings (which has not transpired so far as NPA estimates for large banks don't seem to be at a huge risk and provisions among large banks remain adequate).

Nifty is trading at ~22x FY22 EPS, after building in ~39% EPS growth in FY22, which can come through, aided by global cyclicals and select large banks. So, while overall EPS estimates are less at risk despite the second wave, the composition of earnings will change if high PE sectors see earnings cut and low PE sectors see earnings upgrades.

We believe it will remain a stock pickers' market in FY22 with bottom-up positive risk-reward investment ideas still available across most sectors. Our preference is for mid/small caps and economy-facing sectors, which will benefit as markets start looking at FY23 and beyond.

Our preferred sectors continue to be large banks, cement, infrastructure, gas, insurance and capital markets, while we remain underweight on consumption (staples, discretionary and autos), NBFCs, and small banks.

Q4FY21 results snapshot: Overall, it was another strong quarter with margin-driven beat across multiple sectors. In terms of stocks, notable earning upgrades were done in Tata Motors, Bharat Forge, SBI Life, Wipro, ONGC, Apollo Hospitals, Max Financial, UTI AMC, Ahluwalia Contracts, HG Infra, Gateway Distriparks, Persistent Systems, CDSL, JK Lakshmi, Orient Cement, Vinati Organics, Sudarshan Chemicals, and Alkyl Amines.

Our view: Index absolute upsides capped; bottom-up opportunities still visible across sectors as economic recovery plays out in FY23. While our sector preference has remained largely unchanged in the past six months, post the sharp rally of 100% from March 2020 lows and more so within select mid/small caps, easy returns have been made. The economy-facing ones like select banks, cement, infrastructure, real estate, utilities, PSUs and gas stocks still have room for rerating while IT and pharma look fairly valued with earnings-driven upsides. Consumer staples and discretionary face PE derating risks, given stretched valuations.

Model portfolio: maintain bias towards economy-facing and value sectors. We have been cutting weights in chemicals and IT sectors, post the sharp run-up in select stocks. We add Tata Steel and CESC to the model portfolio, while we cut weights in Persistent, CDSL, and Gujarat Gas.


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