Credit Suisse Expects More EPS Upgrades After Q3 Earnings

Credit Suisse expects more upgrades to consensus earnings per share estimates, citing a sharp and broad-based recovery.

Consensus now expects 14% growth in Nifty EPS for 2020-21 compared with 5% in October 2020, analysts led by Neelkanth Mishra wrote in a note. Estimates for 2021-22 and 2020-23 EPS have been upgraded by 6% since September 2020, led by metals, IT, private banks, non-bank lenders and autos, it said. "While the quantum appears small, estimates used to fall 2-3% every quarter in the past.”

The brokerage expects upgrades to continue as the real output in FY22 maybe 7-8% higher than in FY20.

Only 22 BSE 100 firms reported a decline in sales in the quarter-ended December—the lowest in 12 months. Metals, telecom, discretionary, cement, IT and healthcare sectors witnessed sales growth over the preceding year while energy and industrials saw declines.

Credit Suisse advises staying overweight on sectors like financials and industrials, where it expects a reset in earnings per share to be the strongest. Within financials, State Bank of India and Shriram Transport Finance Ltd. are its top picks, while Larsen & Toubro Ltd., ABB India Ltd. and Container Corp. of India Ltd. are from the industrials segment.

The firm, however, said margins for sectors other than financials may have peaked. “Higher metal prices, telecom ARPUs, cost controls in sectors like cement and energy and lower promotion expense in consumer and pharma helped,” the note said. “But several, if not most, of these costs are likely to return.”

Margins in the banking sector fell as provisions increased owing to a lower base. However, provisions as a percentage of pre-provision operating profit were the second-lowest in the last five years, at 51%, it said.

“We expect banking profit margins to improve going forward, as provisions drop from the 70-80% range seen in the last five years,” the note said.

The Road Ahead

Yet, the estimated growth in consensus Nifty EPS for FY22 has come down to 39% year-on-year from 44% in October 2020. Credit Suisse expects most of the FY22 EPS growth to come from banks, energy, discretionary and I.T. sectors.

“Consensus expects FY22 BSE 100 sales (ex-financials) to grow by 21% and Ebitda margin to remain flat at 18%, taking the Ebitda growth to 21%,” the note said. The firm expects most of margin expansion in autos, discretionary, and industrials, which will be offset by cement sector.

It expects sales growth in FY23, excluding financials, to be at 10% while margins may expand to 18.5% from 18.2% led by telecom, energy, healthcare, autos, industrials and discretionary sectors.

While Credit Suisse expects topline growth to emerge higher, it expects Ebitda estimates to be upgraded as well. “However, the margin expansion may not persist.”