Brokerage views

The latest corporate result season has started on a neutral note with the IT major TCS
reporting a good set of numbers, which though fell slightly short of consensus estimates.
However, the broadly the results are likely to be lower than the previous estimates due to
extended lockdown and continued logistic constraints.

Macro data continues to be little worrisome. GST collections in May (reported in June) fell to
eleven month low. Monsoon has stalled over north and north west India. Trade deficit has
increased and headline inflation continues to rise. The debt levels have risen and collection
efficiency has diminished in June quarter.

Sector wise, steel mills have reported easing prices, while cement demand had been mixed.
Chemical and agrochemical sectors have are expected to be having good time. IT demand
remains firm, while there is some pressure on margins.

Some brokerages have highlighted that market valuations may be close to fair level and not
offer significant gain from the present levels. However, there is divergence in valuations
within major segment and opportunity may lie therein.

Highlights of the brokerage calls

1QFY22 results preview

Since 1QFY21 was mostly a washout quarter, on yoy basis 1QFY22 would appear a quarter
of strong growth. However, on QoQ basis, the earnings might show a sharp decline from
4QFY21. The sectors most affected would be consumer discretionary and capital goods.
Pharma, IT, metals and banks are widely expected to buck the trend.

Q1FY22 PC Universe Revenue/EBITDA/PAT yoy growth is estimated at
43.8%/51.6%/148.1%; excluding financials, Revenue/EBITDA/PAT looks better at
50.6%/92.8%/246.0%. While base remains favourable, actual earnings are pressured due
to COVID-19 related restrictions in Q1FY22. On qoq basis, majority of the sectors like
Consumer Discretionary (Automobiles, Retail, Consumer Electricals), Capital Goods,
Cement, Infrastructure, and Logistics are expected to register a sharp decline; slight growth
is expected in Pharma, IT, Banks and Metals. (Phillips Capital)

Kotak Institutional Equities expects net profit for the BSE 30 index to increase 72
percent YoY but decline 3 percent QoQ. The Nifty 50 index is expected to increase 127
percent YoY and 6 percent QoQ. “We estimate EPS of the BSE 30 index at Rs 2,303 for
FY22 and Rs 2,631 for FY23 and of the Nifty 50 index at Rs 715 for FY22 and Rs 813 for
FY23,” it said.

Commodity prices continued their upward march on the back of global demand recovery,
while India faced a second wave of lockdowns in Q1FY22. Benchmark GRMs rose to
USD2/bbl+. OMCs hiked auto fuel prices aggressively though petrol margin was impacted.
OMCs are expected to see lower core GRMs qoq due to higher F&L cost and Middle East
OSPs. Petrol marketing margin also plunged 50% to Rs1.5/ltr, though diesel was better.
There would be some forex loss as well.

Upstream earnings would be driven by high crude realizations. CGD companies would see a
qoq volume decline, though these may should report better margins. (Emkay Research)
Led by negative base of 28%, cement volumes of our coverage universe are expected to
grow 43% YoY. EBITDA would grow by 46% YoY, largely led by volume growth. EBITDA/t is
expected to expand by 2% YoY at Rs1,320 on back of operating leverage and higher prices,
despite increase in fuel and freight cost.

Against street’s expectation of contraction in margins, we believe that sector will
sustain margins at elevated levels in FY22 on back of price hikes.

Cement prices increased by Rs22/bag QoQ, fueled by rise in costs. South and East
witnessed highest increase as both regions were impacted by steep fall in volumes. Cement

prices in East/South increased sharply by Rs40/Rs40 per bag QoQ. Western region’s prices
improved by Rs20/bag on back of sharp increases in Maharashtra, whereas prices
increased marginally by Rs7/bag in Gujarat. Prices in Central region grew by Rs5/bag QoQ
due to muted increase in UP. Due to strong volume push by key cement players, overall
prices increase in North is limited at Rs6/bag QoQ.

We expect tier-I IT services firms to report an average QoQ constant currency (CC) organic
revenue growth of 3.6% in Q1FY22E, while reported average USD revenue growth could see
marginal cross currency tailwinds (GBP appreciated QoQ 1.4%). For tier-II companies, USD
revenues could increase on an average of 3.9% QoQ.

Revenue growth would be led by ramp-up of large deals and improving demand
environment across verticals. The pace of revenue dip could moderate for affected verticals
such as Travel, Retail, Energy and Aerospace – Accenture’s recent results highlight
continuing recovery in pandemic-affected industries. (Elara Securities)

In metals, margins are likely to expand meaningfully in 1QFY22. However, working capital
release which has played a significant role in FY21 deleveraging for most companies may
see some reversal as coking coal prices (up 62% in 1m) / finished good prices shore up. (JM

Emkay Research highlighted that Agro input companies under our coverage to deliver 11%
yoy revenue growth on the back of 1) strong demand in the export segment in current
quarter, 2) higher global commodity prices, and 3) favorable comparable in the export
segment due to production disruption in Q1FY21. All agrochemical companies have passed
on the impact. Demand environment is robust for CRAM and exports of higher raw material prices to the consumers in the quarter.

Macro trends

India’s trade deficit rose to US$ 9.4bn from US$ 6.3bn in May’21 led by higher oil and
non-oil-non-gold imports. Over a 2-year period, exports have risen by 29.7%. On the other
hand, imports have increased by only 2%, led by lower gold imports. Non-oil-non-gold
imports, barometer of demand, have increased by 11.3%. We expect non-oil imports to
improve as domestic restrictions are eased. Exports are likely to remain buoyant
implying a trade deficit of US$ 165bn in FY22 (US$ 102.2bn in FY21). (BOBCAP Research)
The Union Cabinet approved the Revamped, Reforms-Based and Results-Linked
Distribution Sector Scheme for supporting discoms to undertake reforms and improve
performance in a timebound manner, as was announced in the FY22 Union Budget. The
scheme is aimed at providing 24×7 uninterrupted, quality, reliable and affordable power
supply and seeks to improve discoms’ operational efficiencies and financial sustainability
based on state-specific action plans. Total outlay for the scheme is Rs3,038bn over FY22-
FY26. The scheme is positive for all players across the power sector value chain. (ICICI

GST collections in Jun’21 fell to a 10-month low of INR 928bn. The fall was broadly on
expected lines as the collections represent the sales for May’21, which was a month replete
with state lockdowns. However, it should be noted that actual collections representing
purely the sales of May’21 would be even lower because the Jun’21 figure of INR 928bn
partly includes taxes for the sales in Apr’21 from smaller taxpayers (turnover < INR 50mn)
who were given relaxations in filing returns last month too. Yet, on the positive side-(1) We
estimate the FYTD22 average net monthly GST run-rate to still be in-line with the budgeted
requirement of INR 1.0-1.1trn; thanks to the record collections in Apr’21! (2) Even as the
Centre has stopped disclosing monthly compliance levels, the FM’s recent statement of the
GST tax base at 12.8mn implies a 40+% improvement from Jan’21 levels, and (3) Improved
compliance along with unlocking can indeed aid high GST collections as the “new normal”.
(JM Financials)

India’s non-financial sector (NFS) debt grew 11.8% YoY in 4QFY21 (or FY21), marking
the highest growth in nine quarters and higher than the record low of 8.0% in 4QFY20 (or FY20). Outstanding NFS debt increased to a fresh high of 177.6% of GDP (or INR351tn)
in FY21 vis-à-vis 154.1% of GDP in FY20 (INR314tn).

Within NFS, general government debt (center + states) grew at an all-time high of
20.1% YoY in 4QFY21, while non-government non-financial (NGNF) debt grew at a record
low of just 4.5% YoY. Within the NGNF sector, household debt grew at a decent 10.5% YoY
in 4QFY21 (v/s 11.1% in the previous quarter) and non-financial corporate (NFC) debt grew
just 0.4% YoY, below 0.9% in the previous quarter – marking the slowest ever growth.

An analysis of NGNF debt by lenders suggests bank lending and external commercial
borrowings (ECBs) weakened in FY21, while the loan book for NBFCs and HFCs grew much
faster than in FY20. Lending by scheduled commercial banks (SCBs) to the NGNF sector
grew at a record low of 4.5% YoY in FY21, and lending by NBFCs/HFCs grew 8.8%/4.9%.
ECBs, on the other hand, contracted 6.1% last year, while borrowings through CBs grew
faster at 9.5% in FY21. (Motilal Oswal Securities)

The Reserve Bank of India on Friday announced the cut-off yield for the new 10-year
bond at 6.10% per annum, higher than that of the current benchmark, signalling a slight
tolerance for a higher yield after months of trying to keep it at 6% or less. (Reuters)
The Reuters investigation showed most of the 75 households in the Uttar Pradesh cluster, a
combined 518 people, have taken out total debt of 6.12 million rupees ($82,250), more than
80% of which remains unserviced, the householders said.

Borrowing has risen by three times since the pandemic hit in March 2020 and about half of
that was taken out the past six months, the survey found.

With no jobs or with bread-winners sick, the cumulative monthly income of the 75
households has dropped to about 220,000 rupees ($2,960) from 815,000 rupees ($10,960)
before the pandemic. (Reuters)

Consumer Price Index or CPI inflation is likely to rise to 6.5% in June’21 from 6.3% in
May’21 on a seasonal pick-up in food prices. Food & beverage inflation is likely to rise to
5.99% in June’21 from 5.24% in May’21, led by higher vegetable prices.
Core CPI inflation is likely to moderate slightly to 6.41% from 6.55% in May’21 on the
back of a decline in gold and silver prices. (NBIE)

The rate of positive tests in parts of Maharashtra, where the catastrophic second wave took
off, is climbing weeks after New Delhi warned that a new and potentially even more
dangerous Delta Plus variant was circulating there and in at least two other states.

The rural district of Satara went into “full” lockdown this week, while restrictions on eating
out and other activities have been tightened across the state. Pune, an important business
hub, has also reimposed night curfews.

Indian authorities have warned about the potential for a third wave after facing intense
criticism for failing to avert a huge surge in infections in April and May, with devastating
consequences. (Financial Times)

Our prognosis considers an imminent inflection point with respect to a) Fed’s tapering
and US fiscal cliff, b) rising probability of US-China conflict, c) fading of China fiscal
stimulus in 2H2021 and after, and d) ebbing of the unsustainable commodity bubble. The
current situation is different in the context of pandemic, but several indicators forebode
scenarios akin to 2011-12, 2014-15, 2018-19 and to an extent 2007-08. Hence, we align
our portfolio pre-emptively. (JM Financials)

Financial Times mentioned that “Delayed monsoon rains are threatening India’s vast
agricultural sector and endangering the recovery of an economy reeling from the
coronavirus pandemic….While parts of the country have received adequate or even heavy
rainfall, swaths of central and northern India have remained dry. Punjab, one of the
country’s largest producers of rice and other staples, has received little to no rainIndia’s meteorological department expects rains in those regions to fall soon. But Giriraj Amarnath, a researcher for the International Water Management Institute, said further delays would result in lower crop yields.”


Cement demand stood mixed in the month of June across the country. Infrastructure
construction and Real Estate activity, especially in the Northern (Rajasthan) and Western
region witnessed a healthy offtake during the month.

Demand across Northern (Delhi), Central and Southern region saw an improvement
compared to their previous month. Demand across Eastern region witnessed weak demand
on account of heavy rainfall. Non-Trade demand was less impacted, but trade/rural
demand saw a huge decline as second wave of Covid-19 hit the rural areas severely. Prices
in the Eastern region could not sustain as the demand was impacted on account of heavy
rainfall and prices too fell in the Southern region. Prices in the Northern (Delhi) and Central
region were hiked in June. Prices in the remaining regions remained unchanged. Demand is
expected to improve from July onwards with further easing of restrictions. As the input
costs (pet coke and diesel) remaining high, cement prices are unlikely to correct further.
(INDSE Securities)

India domestic steel mill headline price is likely to witness a cut for the month of July,
across longs and flat products. While long product price dip is likely to be driven by
seasonality/ slowing construction activity, flat product prices will be determined by a host
of variables. On the flat product side – Indian mill price have been ~INR5k/ton higher than
the dealer price for some time now and with dealers facing demand/liquidity concerns mills
may have to take a price cut of INR2-3k/ton (3-4%) or extend discounts if a rollover is
effected for Jul’21, as per our channel checks. (JM Financials)

Sector research

India is emerging as a fast-growing specialty chemicals hub on a rise in its
competitiveness, driven by: a) the availability of low-cost labour (vs. China); b) lower
regulatory costs (given China’s tightening environmental norms); c) rising availability of lowcost feedstock for Indian players; and d) India’s strong IP protection and improving R&D

Hence, India’s specialty chemicals market has posted a 11.7% CAGR over CY14-19 (vs.
5.7% CAGR for global) and reached USD 32bn in CY19 (or 4% of global specialty chemicals
market of USD 805bn, vs. 25% market share of China). India’s accelerated growth is
likely to continue over CY19-25 with 12.4% CAGR over CY19-25 (vs. 6.4% CAGR for
global). Hence, India’s specialty market is likely to reach USD 64bn (or 5.5% of global
market of USD 1.2tn) supported by: a) robust growth in specialty chemicals exports, where
India’s share was 6% in CY19 (vs. 18% of China), on account of rising competitiveness of
Indian players and ‘China+1’ strategy adoption by MNCs; b) robust domestic consumption
growth (given India’s low per capita consumption at only USD 23/year vs. the global
average of USD 100/year); and c) rising import substitution (driven by government’s
favourable policies) (JM Financials)

The RBI’s Financial Stability Report (FSR) points out that banks across countries have
weathered the crisis better than initially anticipated, although there are imminent risks
of slippages in the Retail and MSME portfolios (particularly as regulatory forbearance is
withdrawn). Macro-stress tests for credit risk show that scheduled commercial banks’
(SCBs) GNPA ratio may increase from 7.48% in Mar’21 to 9.80% by Mar’22 under the
baseline scenario and to 11.22% under a severe stress scenario.

The overall provisioning coverage ratio (PCR) increased from 66.2% in March’20 to 68.9% in
March’21 primarily due to a relatively sharper decline in GNPAs. The PCR for public sector
banks (PSBs) increased during FY21, but declined for private banks (PVBs) and foreign
banks (FBs). At the same time, data shows that NPAs in the MSME portfolio for PVBs are
far lower than for PSBs. The overall credit environment remains lackluster on a count of
risk aversion and subdued loan demand. Bank credit to the private corporate sector declined for the second successive year in FY21, with its share falling from 37.6% in FY14
to 27.7% in FY21.

The second covid wave has accentuated the slowdown in wholesale credit relative to retail
credit. With vaccination drives and access being ramped up, globally a hesitant and uneven
recovery is gaining ground under the protective cover of policy support. With the scent of
recovery, global financial markets are upbeat about the reflation trade.

Consequently, tensions are building between policy authorities and markets on the timing
and pace of normalisation of ultra-accommodative policies, with the latter anticipating that
inflationary pressures will force the hand of authorities despite their forward guidance of
extended accommodation. Nevertheless, the RBI notes that any hasty withdrawal of policy
stimulus to support growth before sufficient coverage of the vaccination drive can sap
macro-financial resilience and have adverse unintended consequences. (NBIE)

Market valuations

Motilal Oswal Securities highlighted the growing divergence in valuation within mid
and smallcap indices.

The Nifty Smallcap 100 has been trading at a premium to the Nifty for the first time since
Dec’14. It is trading at a premium of 7% v/s an average discount of 21% on a 12-month
forward basis.

Valuations for the Nifty Midcap 100 index is on par with the Nifty on a 12-month
forward basis.

However, if one were to remove loss-making companies from both the indices, then the Nifty
Midcap/Nifty Smallcap indices are trading at a trailing P/E of 21x/23x FY21 earnings, at a
marginal discount to the Nifty.

Valuations, however, are hiding more than what they are revealing. If one looks at the
trailing 12-month valuations for the NSE Midcap 100 and NSE Smallcap 100 indices, there
is a wide divergence within the index.

We have divided the NSE Midcap 100 and NSE Smallcap 100 universe into four quartiles
based on their trailing 12-months P/E. Loss-making companies have been removed from
the aggregates. The aggregate quartile P/E of the most expensive stocks in NSE Midcap
100/NSE Smallcap 100 trade at 80x/79x, while the least expensive stocks trade at
9.4x/8.5x. This 12-month trailing P/E is distorted to an extent by the optically low 1QFY20
earnings, due to the stringent COVID-led lockdown. Historically (as well as on average), the
least expensive aggregate for the NSE Midcap100/NSE Smallcap100 has traded at
8.8x/7.6x, while the most expensive has traded at 50x/56x. The median P/E for the NSE
Midcap 100 index is 29x.

(Go back )

Author: Midas Finserve

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