Recovery Overcomes Lockdowns In Q1, Margin Rebound Not Broad-Based, Says Credit Suisse

The economic recovery in the country continued during the first quarter of the ongoing financial year, overcoming the second wave of the pandemic, according to Credit Suisse.

Sales of BSE100 companies grew at a compounded annual rate of 3.6% in two years through June 2021; and excluding oil and metals, it stood at 5.3%, according to a Credit Suisse note authored by note authored by Neelkanth Mishra, Abhay Khaitan and Prateek Singh. The two-year CAGR was also only marginally lower than 4.9% in March, it said.

More than two-thirds of the companies saw sales above the June 2019 level. Improvement in sales and earnings before interest and taxes or EBIT was, however, less broad-based. It was contributed by nine firms in metals, banks, IT and telecom sectors, Credit Suisse said.

The headline margin improved in the first quarter, but not in consumer segments.

The EBIT margin of the 100 largest and most liquid BSE large- and mid-cap companies was 2.7 percentage points higher than in June 2019, but mostly because of metals, banks and telecom stocks, according to the note. Consumer-facing segments, both staples and discretionary, had lower margins, likely as firms held back price hikes in a quarter that had lockdowns and consumer sentiment as well as incomes were weak, the note said.

"With global commodity price increases now abating, margins can stabilise or improve going forward," Credit Suisse said.

According to the research firm, while just 20% of BSE100 firms beat estimates, the lowest in seven years, FY23 earnings-per-share estimates still saw a minor upgrade, with metals and energy upgrades offsetting cuts elsewhere.

"Commodity-driven upgrades are indeed of poorer quality, but while FY22 upgrades are heavily driven by metals (60% of upgrades), the FY23 changes are far more broad-based," the note said. "In FY23, financials are expected to drive 42% of the year-on-year growth in Nifty EPS (private banks 36%, PSU banks 5%, NBFCs 7%) with another 20% from energy and 19% from discretionary."

Credit Suisse is 'overweight' on ICICI Bank Ltd. and State Bank of India among lenders and Larsen & Toubro Ltd., Siemens Ltd. and ABB India Ltd. among industrials, citing that credit-growth assumptions need significant upgrades in view of FY23 GDP possibly growing 5 percentage points higher than the consensus.