Earnings growth momentum continues unabated in October–December 2021

What’s Buzzing:

Corporate performance (ex-financials) for October-December 2021 (Q3FY22) came in encouraging with topline growing 13% on a QoQ basis. On the operating profit front, the sequential growth was at 12% amid ~20 bps decline in operating margins to 17.6% on the back of higher RM costs partially mitigated by operating leverage benefits. On the PAT front, earnings were up 7.3% QoQ, constrained by lower other income and higher effective tax rate. At the Nifty level (including financials), broader trend continued with PAT growth a tad higher (at 8.8% QoQ) than ex-financials subset due to better performance by corporate banks.

Context:

Global as well as Indian equity markets have been quite volatile in the recent past, with the Nifty correcting from all-time high levels of ~18,600 in October 2021 to ~17,250 levels now (down ~8% from peak). It is primarily tracking inflation led interest rate hike outlook by global central banks, geopolitical tensions and rise in crude prices. Corporate earnings, a true barometer for the market’s health, on the other hand, has been quite resilient with growth momentum continuing unabated. The management commentary along with Q3FY22 results was optimistic and hopeful of a strong rebound, going forward.

Perspective:

Macroeconomic indicators i.e. GST collection, e-way bill generation, advance tax collection, etc. point to better-than-anticipated economic rebound. With growth capex on the anvil by the public as well as private sector, we expect a broad based economic recovery, going forward. The shot in the arm is the capital expenditure outlay in Union Budget 2022-23 (Rs 7.5 lakh crore, up 35% YoY), which is expected to have multiplier effect across the domestic economy. Incorporating revised PAT estimates across index constituents, our FY22E Nifty EPS gets an upgrade of ~5% at Rs 720/share vs. earlier estimate of Rs 685/share. FY23E estimates, however, remain unchanged at Rs 815/share. Incorporating FY24E numbers, we expect Nifty earnings to grow at 20%+ CAGR over FY21-24E. Keeping our index targets intact we now value the Nifty at 20,000 i.e. 23x PE on FY23-24E average EPS of Rs 870/share. Corresponding target level for Sensex is at 66,600, offering a healthy 15% potential upside.