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Corporate earnings for the December quarter (Q3) of the financial year 2021-22 (FY22) came mostly in line with Street expectations. While a number of sectors like auto, cement, consumer staples, metals, healthcare reported wide divergence due to a sharp surge in raw material prices; financials and IT sectors stood out, brokerage house Motilal Oswal noted in a results review report.

"Q3FY22 corporate earnings were healthy given the context of unprecedented input cost headwinds. Healthy earnings were largely driven by: a) the BFSI sector due to improvement in asset quality and pick-up in loan growth, b) high energy prices that benefitted the O&amp;G sector, and c) continued healthy delivery in the technology sector," MOSL said.

The banking, financial services and insurance (BFSI) sector, in the third quarter, was aided by improvements in loan growth and disbursements, while asset quality improved sequentially propelled by moderation in slippages as well as healthy recovery and upgrades, stated the report. Meanwhile, it added that IT Services saw another quarter of robust dollar revenue growth as the deal pipeline remained healthy and hiring momentum offered further visibility on demand.

"Among the <a target="_blank" href="https://mintgenie.livemint.com/indices/details/NSI/nifty-50-I0002">Nifty</a> constituents, 43 percent beat our profit after tax (PAT) estimates while 24 percent missed. Except for Metals and oil and gas, Nifty constituents clocked 12 percent YoY growth at the PAT level (in line with estimates)," MOSL informed.

As per the report. among the major sectors – Private Banks, NBFC, Logistics, Retail and Utilities reported higher-than-estimated PAT growth, while Autos, Cement, Consumer Durables, Healthcare and Metals reported PAT below estimates in Q3FY22.

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Sector Highlights

1) Technology – The report noted that Q3FY22 was a good quarter for Indian IT Services as companies under our coverage reported an overall QoQ topline growth of 4.6 percent (in dollar terms), despite seasonality due to furloughs. The demand remains strong in the medium term.

2) Private Banks and NBFCs – MOSL stated that asset quality trends improved for these sectors. Most of the banks posted a decline in the ratios of their non-performing loan, led by controlled slippages as well as healthy recovery and upgrades. NBFCs saw sharp improvements in disbursements and collection efficiencies, it added.

3) Consumer – As per MOSL, discretionary companies (Paints, QSR, Titan, Liquor, etc.) delivered strong double-digit topline growth while staples’ performance was muted as rural showed visible slowdown and margins were hurt by raw material prices.

4) Cement – The sector was adversely impacted by weak volumes owing to unseasonal rains while high energy costs took a severe toll on margins and profitability, said MOSL.

5) Healthcare – After 12 quarters of growth, the December quarter marked the first decline in profits as a rise in raw material costs due to supply disruption in China and continued price erosion ins US depressed profitability, explained MOSL.

However, now the focus has shifted to global central banks as inflation has persistently remained high in developed markets and oil has crossed $90/bbl. The recent geopolitical flare-up pertaining to Russia-Ukraine further unnerved the near-term sentiments.

The US 10-year bond yields have also crossed the 2 percent level while the domestic 10-year yields trade at 6.7 percent.

According to the brokerage, despite the high inflationary environment, earnings have largely remained in line with expectations and Nifty FY22/FY23 estimates have not witnessed any material downgrades over the past six months.

The RBI, meanwhile, has also remained dovish in its Feb’22 policy and soothed the concerns of Bond markets where yields hardened sharply post-budget.

"Nonetheless, given the global and local macro construct of rising rates, higher crude prices, consequent higher inflation and bond yields, geopolitical flare-ups and rich valuations, we expect volatility to remain elevated and markets to stay sideways until earnings catch up with valuations," said MOSL.

It continues to remain overweight on BFSI, IT, Consumer, Metals, and Cement, and Underweight on Autos and Energy sector.

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