Surprise amid pandemic: Firms across sectors beat Q2 earnings expectations

The September quarter (Q2) earnings season has been among the best surprises in the pandemic-hit FY21. Not only did earnings beat expectations, but the beat was also for a larger number of companies and sectors. As a result, most brokerages have revised upwards their earnings estimates, not only for FY21, but also for FY22.

Analysts at Motilal Oswal Financial Services, led by its head of research-institutional equities, Gautam Duggad, said: “With an upgrade (>5 per cent) to downgrade ratio (< -5 per cent) of over 4:1, this has by far been the best earnings season in many years. Around 63 per cent of the companies in our coverage universe beat Q2FY21 estimates, while 18 per cent reported below-estimated results... Of the 18 sectors that we track, 13 delivered profit after tax above our estimates, three were in-line, and two were below expectations.” This has resulted in the first material earnings upgrade for Nifty EPS (earnings per share) estimates in many years.

Costs, rural demand, and lower provisioning by lenders helped companies surprise investors. ICICI Securities, led by Vinod Karki, said: “Q2FY21 earnings beat was driven by low expectations, cost-savings, pent-up demand, better demand in rural India, export markets, and government spending.” 

Here are 10 firms that have witnessed sharp earnings upgrades. Their earnings estimates for FY21 have risen by 23-148 per cent (average 57 per cent), while that for FY22 has seen a mark-up of 14-50 per cent (average 26 per cent).

CEMENT: Dalmia Bharat
Expect growth in volumes

  • Driven by higher volumes and prices, along with lower costs, the cement maker posted its highest-ever Ebitda in Q2, forcing analysts to up their earnings estimates
  • Compared to expectations of a decline of 3-5% in costs, its expenses fell 10% YoY in Q2;  realisations were up 2% YoY
  • ICICI Securities said raw material and power & fuel costs declined 14% YoY due to stoppage of external clinker purchase after the commissioning of a 3.1-mt  clinker unit and 3-17% YoY decline in prices of fly ash, slag, and petcoke
  • While cost improvements continue and shall further improve Ebitda per tonne, the increasing use of green energy (from 9% to 35-40% over five years) and debt reduction are positive
  • Though pressure on cement prices in the eastern region is likely, analysts expect volume growth of 10-12% in FY22, aided by capacity ramp-up and higher demand


Mining: Vedanta
Driven by commodities

  • Lower cost of production and higher commodity prices are among the key drivers of Vedanta's earnings and top line, which were ahead of expectations in Q2
  • While maintaining cost of production sequentially, the YoY reduction has been driven by a decline in alumina and power costs, said ICICI Securities. The brokerage has upped its FY21 and FY22 earnings estimate by 84% and 25.3%, respectively
  • The London Metals Index has been up 7% sequentially and 5.3% YoY in Q2. At over $2,968 at end of September, it was higher than Jan-Feb levels. Since then, it has gained 13% to $3,355 now 
  • Vedanta's crude oil business is also seeing traction. Oil prices — while gaining from $20 per barrel levels were flat flat sequentially in Q2 — are up 15% to $48 now. And, there may be more gains, believe analysts


Auto: Motherson Sumi
Aggressive plans

  • Improving margin trajectory in its international businesses, as was the case with greenfield plant at its foreign subsidiary SMP in Q2, is expected to drive consolidated margins 
  • Recovery in passenger vehicle volumes should help its Indian business to rebound
  • Strong free cash flow generation in FY22 and restructuring should enable the auto components maker to pursue more inorganic opportunities
  • The 3.6x revenue jump target to $36 billion over five years indicates aggressive growth plans


Diagnostics: Thyrocare Technologies
A Covid testing beneficiary

  • Steady recovery in non-Covid testing, with volumes touching 90 per cent of pre-Covid levels, has helped the diagnostics major
  • This, coupled with improvement in the imaging segment, should help Thyrocare revert to year-on-year growth by the March quarter of 2021
  • While core diagnostics revenues will take a couple of quarters to get back on growth track, near-term revenues are expected to be aided by Covid testing
  • Together these account for 30 per cent of revenues and sales in Q2 are at twice of June quarter levels 
  • Higher volumes helped operating profit margins to recover to 40% levels in Q2 (15% in Q1) and margins are expected to stay above that in FY22


Pharma: Laurus Labs
Ready for capex booster

  • After 77% YoY revenue growth in Q1, it posted another record quarter with a 60% uptick in Q2
  • Growth was led by tender business, higher volumes in the US market, and European contract manufacturing sales
  • Formulation sales set to be the main growth engine, led by a robust generic pipeline in developed markets and backed by an expanded manufacturing base
  • The company has raised its capex plan for FY21-FY22 to Rs 1,200 crore from Rs 700 crore
  • Increasing share of high-margin businesses expected to sustain record profitability in Q2


Telecom: Tata Communications
The best upgrade

  • Tata Communications is the only in this list to see a 50%-plus earnings upgrade for both FY21 and FY22
  • The upgrades were led by growth opportunities due to digitisation trends among corporates and higher data traffic and demand for platform services
  • The gains were sharper at the operating level with double-digit growth (26-38%) in profits for three quarters in a row
  • Net debt and cost of borrowing have come down; the extent this could be a rerating trigger

Specialty Chemicals: SRF
Better guidance

  • Quicker-than-expected turnaround in technical textiles and growth in packaging films and chemicals business segments helped the company to outperform in Q2
  • Management has increased revenue growth guidance for the chemicals business (largest segment) from 20-25% to over 25% for FY21
  • Earnings upgrades to the tune of 14-23 per cent over FY21 and FY22 was also led by higher margins in packaging
  • Kotak Institutional Equities said its impressive track record in key segments provides comfort on incremental plans to expand capacity and diversify into new chemistries to drive earnings growth in the medium term


Steel: Jindal Steel and Power
Easing debt load

  • Strong steel volumes (up 38%), better prices, and cost reduction helped JSPL post a 40% rise in consolidated Ebitda in Q2, its highest-ever
  • Steel prices have been rising. With a higher share of long products — witnessing prices catch up with flat products, JSPL is seen as a key beneficiary 
  • Lower coking coal prices and iron ore costs will aide profitability
  • Over six months, it has reduced its net debt by Rs 7,000 crore to under Rs 29,000 crore
  • Motilal Oswal has raised FY21 and FY22 Ebitda estimates by 11% and 5%; it expects JSPL to reduce its debt to Rs 22,400 crore by FY22


Banking: State Bank of India
Good loan recovery

  • Despite a challenging environment, State Bank of India (SBI) delivered a strong beat in Q2 helped by better margins and lower provisions
  • While asset quality was masked by the Supreme Court's dispensation, analysts said restructuring requests of Rs 6,500 crore in Q2 and another Rs 13,000 crore expected by December take the overall potential restructuring pool to Rs 19,500 crore. At 0.9% of loans, this is far lower than expected
  • Improving collection efficiency which, excluding agri loans, recovered sharply to 97% and was in line with most large private lenders
  • Motilal Oswal has sharply raised its FY21 and FY22 earnings estimates by 45% and 24% due to healthy net interest income and moderation in credit cost


Tyre: Ceat
Riding on sales surge

  • Revenue growth in Q2 was led by increasing supplies to OEMs (original equipment makers), as well as the replacement market
  • OEM sales have picked up on the back of higher preference for personal mobility options by consumers of both two- and four-wheeler segments
  • Recent margin gains were led by lower commodity costs and higher share of the more profitable replacement segment where growth continued to be strong
  • Margins are likely to moderate on the back of rising commodity costs and higher share of the OEM segment, but cost savings and lower capex intensity will help
  • Elara Securities believes capex intensity is coming off at a time when demand is reviving, which is expected to result in positive free cash flows over FY22-23

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