Uplooking quarter, broad-based recovery on cards for corporates

CORPORATE earnings further gained momentum as economic activity rebounded in the post Covid unlocking era with optimism fuelled by the festive season. Q3FY21 earnings staged an impressive show and were broadly ahead of estimates as corporates continue to benefit from lower raw material costs and realised leaner cost structures. Management commentary was enthused by the recent growth oriented Union Budget by the Central government with conducive macroeconomics supporting healthy growth prospects, going forward. At the index level, excluding the BFSI space, in Q3FY21, net sales declined ~2.5 per cent YoY, primarily driven by double digit topline decline in the oil & gas domain amid muted crude prices, according an analytical report by ICICI Direct Research group.

Except oil & gas and banking space, Nifty topline posted growth of ~10 per cent YoY. On the profitability front, EBITDA margins at the index level came in healthy at 18.9 per cent, up 310 bps YoY. Savings were realised in raw material costs, which, for the quarter, came in at 45.9 per cent of sales, down ~600 bps YoY. At the PAT level, in Q3FY21, growth was stupendous at ~28 per cent YoY. PAT growth was driven by expansion in operating margins amid tight control on interest as well as depreciation charge.

On the sectoral front, in banking space, broadly on a proforma basis GNPA levels rose ~30-50 bps with some exceptions on either side. Stress accretion (proforma GNPA + restructuring) was at ~2.5-3 per cent, lower compared to earlier estimate and within guidance provided in September 2020. Auto sector results were robust, nearly all across the board particularly in relation to margins, amid 10.5 per cent YoY growth in total sales volume at 72.8 lakh units. In the capital goods domain, execution picked up pace sequentially with key highlight for the quarter being robust order inflows. In the FMCG space, strong growth momentum continued in Q3FY21 led by robust growth in rural regions supported by significant increase in government spends post pandemic

Going forward, we expect Nifty earnings to grow at 24.2 per cent CAGR over FY21E-23E. Using a bottom up approach and giving discount to target weighted average PE, the research group valued the Nifty at 16,300 i.e. 22x P/E on FY23E EPS of 740 with corresponding Sensex target at 54,600.

(Source: ICICI Director Research Group)