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India Equity Strategy - Quarterly flipbook: Q4FY22-Cost inflation driving downgrades

Posted On: 2022-06-11 13:51:57 (Time Zone: IST)

Varun Lohchab, Institutional Research Analyst, HDFC Securities.

Q4FY22 earnings season saw an overall in-line performance with wide divergences across sectors and companies. Aggregate revenue/PAT grew by 26%/22% YoY across the HSIE coverage universe (~200 stocks), while they had a three-year CAGR of 11.2%/17.1%. Our coverage universe saw strong YoY growth in the segments of energy, metals, chemicals, lending financials and real estate while infrastructure and cement sectors disappointed. IT continued its steady growth. Common theme across management commentaries was their attempts towards price hikes to counter elevated commodity inflation and freight costs. Various industry players found it challenging to execute it adequately without disturbing demand except few auto & chemical companies.

~54% of our coverage stocks have beaten earnings estimates (vs. ~48% in Q3FY22). Overall, inline performance of the coverage universe with a slight miss of 0.7% was led by energy and infra. Given steep cost inflation expected in 1HFY23, most of the sectors witnessed earning cuts led by energy, IT, industrials, banks and consumers. Consequently, overall earnings estimates witnessed cuts of 4.3% and 4.1% in FY23 & FY24 respectively. For the HSIE coverage universe, both FY23 & FY24 projected earnings growth stands at 13.3% incorporating momentum normalisation & steep cost rise after robust earnings growth in previous two years. Further, Nifty consensus FY23 EPS remains largely unchanged (we see downside risks to this in 1HFY23) and it is trading at ~18.7x FY23 EPS and ~16.1x FY24 EPS.

Sector highlights: Large banks witnessed strong recovery in asset quality and reduced credit cost which made them confident enough to accelerate lending. After a sharp uptick, IT sector growth is reverting to medium term base line. Staple producers felt pinch of inflation as volume growth decelerated and rural was yet to pick up. Price hikes were inadequate to counter inflation. Apparel bounced back to pre-covid level and profitability restored due to price increase and higher full price sales. Footfalls in malls are healthy and spend ticket size has increased. Paints delivered growth in spite of price hikes but jewellery and footwear struggled as cost pass through impacted demand. Chemical producers reported healthy revenue growth and adequate pass through of raw material cost increase. Rise in imported coal price and lower domestic supply created power deficit situation and merchant prices rose. Infrastructure sector enjoyed tailwinds and healthy order book given government's focus on infra projects. Elevated input prices spoiled the party though as risks of margin compression and projects getting delayed rose. Strong pre-sales growth and higher collections witnessed in realty sector which also could absorb partial price hikes. Upstream oil & gas companies reaped the benefits of higher crude & domestic gas realisation and boosted corporate profit pool of India in a meaningful way. After a hiatus, auto sector looked up led by demand pull. Cement producers couldn't push through adequate price hike on concerns of demand derailment.

Our preferred sectors continue to be large cap banks and IT, industrial & real estate, power, autos, gas, insurance, and capital markets, while we remain underweight on consumer (staples & discretionary), NBFCs, and small banks. Model portfolio: We maintain bias towards economy-facing and value sectors.

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