Nifty50 firms' combined net profit seen rising 25% in third quarter

Metal and mining firms expected to lead earnings growth

The Street is betting on another quarter of strong earnings growth from India's top listed companies, led by metal and mining, oil and gas, and banking, financial services and insurance (BFSI) companies. Manufacturers and consumer goods companies are, however, expected to face another quarter of margin contraction and decline in earnings. The information technology (IT) services exporters, such as Tata Consultancy Services, Infosys, and Wipro, are likely to maintain their growth momentum, but could face margin decline as operating expenses run ahead of revenue growth.

According to brokerage estimates, the Nifty50 companies' combined net profit is expected to rise 24.9 per cent year-on-year (YoY) in the October-December quarter (third quarter, or Q3) of 2021-22 (FY22) to Rs 1.5 trillion - marginally down from an all-time quarterly high net profit of Rs 1.54 trillion in the second quarter (Q2) of FY22.

In comparison, the index companies are expected to report combined net sales — net interest income in case of banks and lenders — of Rs 12.67 trillion in Q3, up 22.6 per cent YoY in Q3FY22 and Rs 11.63 trillion in Q2FY22.

The growth in earnings will be almost entirely led by companies in the cyclical sectors - BFSI, metal and mining, and oil and gas - while the rest of the index companies (non-cyclicals) are expected to see a dip in earnings due to margin contraction.

The analysis is based on earnings estimates for Q2FY22 by brokerages, including YES Securities, Motilal Oswal Financial Services (MOFSL), Emkay Global, JM Financial, Antique Stock Broking, Elara Capital, and ICICI Securities.

“After two strong quarters of earnings growth, we expect the MOFSL universe to register another healthy quarter of 22 per cent YoY growth in Q3FY22 on a high base in Q3 of 2020-21. While aggregate growth is impressive, it is narrow and driven by just four sectors – metal, BFSI, oil and gas, and IT,” write analysts at MOFSL.

Similar to the earlier two quarters, metal and mining companies, such as Tata Steel, JSW Steel, and Hindalco, are expected to top the charts, with 80.3 per cent YoY growth in their combined net profit in Q3FY22 and accounting for nearly 31 per cent of the incremental growth earning of all Nifty companies in Q3. For comparison, metal and mining companies' combined net sales is expected to grow 35.4 per cent YoY in Q3.

Oil and gas producers, such as Oil and Natural Gas Corporation (ONGC) and Indian Oil Corporation (IOCL), are likely to shine with high double-digit growth in earnings, thanks to higher crude oil prices on a YoY basis. The oil and gas companies', including Reliance Industries (RIL), combined net profit is expected to grow 53.5 per cent YoY in Q3FY22, accounting for 40.2 per cent of the combined earnings of all Nifty50 companies in Q3.

In the BFSI space, the earnings growth is expected to be led by Axis Bank, IndusInd Bank, State Bank of India (SBI), Bajaj Finance, and Bajaj Finserv, while HDFC Bank, ICICI Bank, Housing Development Finance Corporation, and HDFC Life Insurance are expected to be the laggards.

In all, the combined net profit of 11 BFSI companies in Nifty 50 is expected to grow 34.2 per cent YoY in Q3FY22, while their combined net interest income is expected to rise 15.3 per cent YoY during the quarter.

In all, nearly half the incremental growth in the net profit of all Nifty50 companies in Q3FY22 is expected to come from three companies (ONGC, Tata Steel, and SBI), while two-thirds of incremental growth in net sales will come from three oil and gas companies in the index (RIL, IOCL, and Bharat Petroleum Corporation).

Most brokerages, however, expect poor earnings growth in the manufacturing and consumer goods space. “Earnings growth in consumer staples is likely to be muted, with a decline in paints and food space and single-digit growth in other consumer categories due to margin pressures from higher input prices,” write analysts at Emkay Global Financial Services.

The fast-moving consumer goods companies, such as Hindustan Unilever, ITC, Asian Paints, and Nestlé, are expected to do a little better with 7 per cent YoY growth in their combined net profit in Q3FY22.

Automotive manufacturers, such as Tata Motors, Maruti Suzuki India, and Bajaj Auto, are however, expected to be the biggest laggards, with brokerages projecting 49 per cent YoY decline in the sector's combined net profit in Q3FY22.

In all, 33 index companies of the 50 are expected to report YoY rise in earnings in Q3FY22, while 47 companies are expected to report YoY growth in net sales in Q3.