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CEOs are optimists - its how they sleep at night. And in their Q3 earnings calls, most management were upbeat about the outlook for Q4.

But now with the results season, we get to compare promises with reality. Lower-than-expected earnings from heavyweights like Infosys and HDFC Bank have already sent jitters across the market.

This week, we look at analyst predictions for the pharma sector: expected Q4FY22 earnings, and how the rise in input costs, the Russia Ukraine war and other headwinds are likely to affect company bottomlines. 

In this week’s Analyticks:

• Pricing pressure in the US market will hit pharma company margins in Q4
• Drug makers with high market share in domestic formulations set for strong growth
• Promising players: Screener for stocks that saw revenue and profits jump in the last quarter, and are rising ahead of Q4 results

Let’s get into it.

Cost pressure, price erosion in US market will compress pharma margins in Q4

Analysts are expecting muted growth for pharma companies in Q4FY22, predicting an average Q4 revenue growth of 7%, and profit growth of 3% YoY.

This tepid profit growth estimates are due to an increase in input costs and intense competition in the US businesses, which are likely to keep margins under pressure. 

In addition, the Russia-Ukraine war will impact the topline of companies such as Dr Reddy’s Labs and Indoco Remedies, which get considerable revenues from Russia and Eastern Europe.

Lower revenue growth in the saturated US formulations market will drag overall revenues of pharma companies in Q4FY22. 

With the US market losing its sparkle, pharma companies are turning to India to improve their growth opportunities. Indian Pharma Market (IPM) grew 3.9% YoY in Q4FY22. Though product volumes fell 3.3% YoY, it was offset by an average price increase of 5.3% and new domestic product launches. 

Price hikes for scheduled drugs makes Indian market more lucrative

India's drug pricing agency, National Pharmaceutical Pricing Authority (NPPA) allowed a price hike of up to 10.7% for price-controlled drugs in April 2022. As a result over 800 drugs, including painkillers, antibiotics, and anti-infectives, which are under the national list of essential medicines (NLEM) will see a price rise. Companies with high exposure to NLEM products like Cipla (30% of its India formulation sales) and Dr Reddy’s Labs (31% of its India formulations sales) will benefit from this price hike in FY23.

On the US formulation business front, analysts expect a muted quarter owing to continued price erosion and limited successful new launches (barring Lanreotide for Cipla and Vasostrictfor Dr. Reddy’s). The US Food and Drug Administration’s (USFDA) drug approvals play a major role in the profitability of pharma companies as margins are usually the highest immediately after approvals and product launches. This is applicable especially for new drugs. Cipla managed to receive five USFDA approvals in Q4FY22 while Sun Pharma and Dr Reddy’s received two approvals each.   

Drug makers focusing on India will perform better in market share

Companies like Dr Reddy’s Labs and Aurobindo Pharma, which get significant revenues from the US market, are expected to post muted growth in Q4FY22. Dr Reddy’s revenue growth will be hampered by the ongoing crisis in Ukraine as it gets over 10% of its revenues from the Commonwealth of Independent States (CIS). 

Trendlyne’s Forecaster for Aurobindo Pharma expects a revenue fall of 3% YoY to Rs 5,888.9 crore as a result of its heavy reliance on US formulations business, which is intensely competitive. In order to foray into the higher-margin domestic formulation business, Aurobindo Pharma acquired Veritaz Healthcare for Rs 171 crore on March 28, 2022.

Cipla stands out in the pharma pack in US business growth. Brokerages like ICICI Securities and Axis Securities see Cipla’s US business revenue rising 16.5% YoY in Q4FY22 to Rs 1,167 crore in Q4 on the back of strong growth in its respiratory franchise, led by Albuterol inhaler and Arformoterol Tartrate solution. 

In the domestic market, Cipla is the market leader in the respiratory segment, which grew 27% YoY overall in Q4FY22. Cipla's revenue is expected to rise 10% to Rs 5,126.5 crore and profit to rise 40% YoY to Rs 577.6 crore in Q4. Analysts see high profit growth mainly due to its product mix shifting towards more remunerative businesses. 

Another company that has considerable market share in the Indian formulation segment is Sun Pharma – the largest Indian pharma company. This drug maker is expected to continue its growth momentum in Q4FY22 both in terms of revenue and profit. Analysts expect Q4 profit growth of 90% YoY to Rs 1,711.7 crore on the back of 12% growth in domestic formulations to Rs 2,991 crore.

Revenues from India and the US together form a major part of total revenues for branded and generic formulations companies. Pharma companies are now trying to diversify their revenues by focusing more on emerging markets. However, different regulatory systems in countries pose a hurdle in launching new products at a fast rate, and its going to take time to win market share in these regions.

Screener: Stocks rising ahead of results, with 15%+ YoY growth in previous quarter revenue and net profit growth

Ahead of results, some stocks are showing strong buying interest from investors. This screener shows ten stocks in the Nifty 500 that rose at least 10% in the past month, ahead of earnings. These companies also posted 15%+ topline and bottom-line growth in the previous quarter. 

Among the ten stocks, two of them are from the metals and mining sector - Vedanta and Hindustan Zinc. The metals and mining sector is on revival mode since the start of FY22, with export opportunities rising for Indian companies. Metal companies are seeing a steady rise in EBITDA earnings over the year, thanks to rising prices in steel, aluminum, and zinc. Indian steelmakers also look set to gain from increasing metal prices, as supply chain disruptions continue.

You can find some popular screeners here.

1. ACC: This Holcim Group company’s stock zoomed 7.4% post-results  despite reporting a close to 30% YoY fall in its Q1 2022 net profit at Rs 396.3 crore. Revenues grew at a tepid 3% YoY, driven mainly by higher sales realisations. However, fuel and power costs rose by over 33% YoY, which ultimately hit its bottomline. The company managed to reduce its per tonne freight and forwarding expenses by 1% YoY in Q4 due to cost optimisation. Analysts at Axis Securities and Motilal Oswal are particularly positive on this cement company as they believe that its upcoming capex project (3.2 million tonnes) in Central India will boost the sales volume growth in FY23.

There was also a report of a possible exit by its parent company Holcim from India. Holcim Group has already exited the cement sector in Indonesia, Malaysia, Singapore and Brazil to reduce its carbon footprint. And if reports are to be believed, Holcim is in early-stage talks with JSW Group and Adani Group for a possible deal. Both ACC and Ambuja Cement could be re-rated if this deal goes through, especially since they are among the top five cement brands in India. ACC (alongwith Ambuja) could command higher valuations at the time of sale. Additionally, Holcim was very slow in expanding cement capacities in India, which led to a loss of market share for both these companies in the last 10 years. A change of guard could very well revive the fortunes of ACC and Ambuja Cement.

2. AU Small Finance Bank: This bank stock touched an all-time high of Rs 1,465.95 this week after it announced that it is considering a bonus issue. The stock outperformedBank Nifty by 22% this month. The bank started to see a revival in growth from Q3FY22 as the economy opened up, as a majority of its lending business is linked to vehicles, business and housing. With demand recovering as the economy normalised, the bank has reorganised itself into 10 SBUs (strategic business units) to improve operational efficiency and scalability to capitalise on the recovery. The bank has a large retail dominated, secured and diversified loan book that is risk-free and ideally placed to take advantage of the economic upturn.

Its Q4FY22 total deposits rose 46% YoY to Rs 52,585 crore, and the cost of funds fell 80 bps YoY to 5.7%, due to consistent improvement in deposits. The loan AUM (assets under management) rose 27% YoY to Rs 47,843 crore as credit demand continued to rise due to improving sentiment on the ground. The bank saw sustained improvement in its asset quality as customers' cash flows improved during Q4FY22.

The bank is working on scaling up its digital banking services to expand into newer markets. It is expected to post robust numbers in Q4FY22, as brokerages like Motilal Oswal expect the net profit of the company to rise 87.6% YoY to Rs 316.9 crore, and Kotak Equities expects profit to grow by 200% YoY.

3. Angel One: This stock rose 17.5% on Thursday after it announced its Q4FY22 results. Angel One’s profit jumped 2.1X YoY in Q4FY22 to Rs 204.7 crore and revenues increased by 63.6% to Rs 685.3 crore. This sharp rise in net profit is due to the operating profit margin rising 6.5% YoY to 42.46%. The company is leveraging its scalable digital business model to keep costs lower. Though the number of clients jumped 2.4X YoY to 92 lakh in Q4FY22, the company reported its lowest average revenue per client (ARPC). ARPC fell 23.7% YoY to Rs 513. ARPC is on a downtrend from Q4FY21, representing intense competition in the brokerage businesses.

The company is benefitting from a sharp rise in demat accounts in India. Demat accounts grew 63.6% YoY in FY22 to 9 crore, with penetration in India increasing by 230 bps to 6.4%.  However, this high growth may not be sustainable as a major factor that affects demat account growth and penetration is the nature of the capital markets. In FY21 and FY22, Nifty 50 rose 71% and 19% respectively, helping the growth of demat accounts. This may change in FY23.

ICICI Securities maintained its ‘Buy’ rating on Angel One and increased the target price by 17.4% to Rs 2,230. The brokerage has a positive outlook on the company as its number of orders grew 83% YoY to 14.7 lakh in Q4FY22. ICICI Sec expects Angel One’s profit to grow at a 15% CAGR over FY22-24. 

4. Larsen & Toubro Infotech: This IT services company’s stock fell for two consecutive sessions since it declared its Q4FY22 earnings. Although the company’s revenues increased 4% QoQ to Rs 4,301 crore, this was below expectations of brokerages like Motilal Oswal, BOB Capital Markets (BOB Caps), ICICI Securities, among others. Revenue grew across all segments of the company with Consumer Packed Goods, Pharma, Retail segments growing the most at 6.2% QoQ to Rs 717.5 crore. However, BOB Caps believes that muted growth in banking and financial services (2.8% QoQ), and manufacturing (2.5% QoQ) led to the company missing its revenue estimates.

The Q4 results brought out mixed reactions from analysts. Motilal Oswal and ICICI Direct maintained their ‘Neutral’ stance on the stock as rising on-site attrition and salary hikes in Q1FY23 may affect EBIT margin by almost 290 bps. EBIT margins in Q4FY22 fell 64 bps QoQ to 17.3% because of lower working days in the quarter and a better revenue mix.

However, BOB Caps maintains its ‘Buy’ rating as it expects robust demand and large-deal pipeline to drive profit margin by 14-15% in FY23. According to its reports, the company bagged three big deals with Fortune 500 clients worth US$ 2 billion.

5. VRL Logistics: This transport company’s stock touched a new 52-week high on Thursday, gaining more than 8% after it announced an MoU (memorandum of understanding) with Ratna Cements. The company is planning to sell its wind power undertaking on a slump sale basis for Rs 48 crore to focus on the goods transport business. This comes after the company announced a capex plan of Rs 560 crore to buy 1,600 trucks to increase its carrying capacity to 25,000 tonnes.

The company’s balance sheet and cash flows are strong enough to manage its capex funding along with taking on an additional debt of around Rs 300 crore. While VRL’s current fleet capacity stands at 69,000 tonnes, once the capex plans are executed the net addition in capacity will be close to 20%. This will help the company increase its volumes by 15-20% in FY23.

Another reason for capex infusion is the new government vehicle scraping norms, which require the scrapping of the older fleet. With economic activities picking up VRL will need enough fleet to meet rising demand.

Trendlyne's analysts identify stocks that are seeing interesting price movement, analyst calls or new developments. These are not buy recommendations.

The stock market has been volatile over the past quarter, with the conflict in Europe, rising prices, and slowing FII inflows. However some stocks have outperformed both their industry and the indices. This screener tracks industry outperformers over the past quarter.

Some of the most interesting outperformers are in defence, mining, packaging, and agro-processing. The rise of these players has been driven by multiple factors - rising domestic defense spending, the jump in commodity prices, and the recent export demand for Indian wheat and maize as the European conflict has taken Ukrainian and Russian grain out of global markets.  

1. PCBL: ICICI Securities retains a ‘Buy’ call on this chemicals company with a target price of Rs 160, indicating an upside of 35.9%. “PCBL is the leading manufacturer of carbon black, which is used as a reinforcing material in tyres,” say analysts Chirag Shah and Shashank Kanodia. They add that carbon black fetches high margins and finds application in paints and plastics among others, and the company derives 6% of its sales volume from carbon black. 

The analysts are positive on the stock due to healthy double-digit growth. They expect the company’s revenue and profits to grow at 23% and 16% CAGR respectively, in FY 21-24, building in 11.4% volume CAGR. The analysts say, “With greenfield expansion under execution and successful strides made in the speciality carbon black domain, long term growth prospects are robust with limited competition in overseas markets.”

2. PSP Projects: Axis Securities maintains a ‘Buy’ rating on this construction company and a target price of Rs 620, indicating an upside of 13.9%. The brokerage is bullish on the company’s prospects due to its “robust and diversified” order book and track record of successful and timely project execution. At the end of December 2021, the company's order book stood at Rs 4,008 crore comprising both public and private sector projects, according to Axis Securities, and it believes that “this reflects healthy revenue growth visibility for the next 2-3 years”. The company has built a diversified order book including institutional, industrial, government, and private residential projects located in six different geographies.  

As of the end of December 2021, the company’s cash and cash equivalent along with Fixed Deposits stood at Rs 215 crore, indicating a strong liquidity profile, Axis Securities said. The brokerage expects the company’s profit to rise 16.1% CAGR over FY22-24.

3. Tata Consultancy Services (TCS): Prabhudas Lilladher maintains a ‘Buy’ call on this IT services company but reduces its target price to Rs 4,221. This indicates an upside of 19.6%. The company reported a 3.5% QoQ growth in revenue to Rs 50,591 crore, which is 0.5% higher than the brokerage's estimates, but the profit of Rs 9,926 crore was 1.9% below estimate. “Margins are expected to remain under pressure in the near term due to high manpower costs and return of travel and facility costs,” says analyst Aditi Patil but expects “supply pressures to ease in H2FY23, as quarterly attrition cools off.” 

The company has implemented a new organization structure dividing the business into four groups: acquisition, relationship incubation, enterprise growth, and business transformation. This will help focus more on clients and their changing digital needs and improve delivery times. The brokerage expects this new structure to drive the next phase of growth.

4. Infosys: HDFC Securities maintains a ‘Buy’ rating on this IT services player, but reduces its target price to Rs 2,140 from Rs 2,230, indicating an upside of 32%. The cut in target price is a result of disappointing Q4FY22 results.  However, analysts Apurva Prasad, Amit Chandra, and Vinesh Vala maintained their ‘Buy’ rating as they are confident about the company’s growth prospects. The analysts  “remain confident in the company’s prospects of growth leadership within the tier-1 IT space”. They also expect the company’s investments to scale cloud services to accelerate growth and improve margins in the near term. 

The bullish stance is also because the analysts expect accelerated net-new large deal wins (H2FY22 at $ 2.2 billion compared to $1.6 billion in H1FY22), the addition of 13 new large clients, and recovery in the life science vertical to provide near-term growth visibility. They also expect the company’s revenue to rise 13.74% CAGR over FY22-24.

5. Hindustan Unilever (HUL): ICICI Securities maintains an ‘Add’ rating on this FMCG company with a target price of Rs 2,450, indicating an upside of 12.5%. According to the analysts–Manoj Menon, Aniket Sethi and Karan Bhuwania–HUL’s underperformance of 60% vs the Nifty over Q4FY22 may be potentially interpreted as the stock already factoring in concerns like rural slowdown-led demand pressure and inflation. They also feel, “large players (in commodity-sensitive categories) are beneficiaries of inflation in the medium term.” 

The company’s strategy of price cuts, efforts to improve affordability, and focus on protein nutrition are positive for long-term category development, say the analysts at ICICI Securities. They also expect the company to deliver on steady premiumisation, enhancing digital capabilities including e-commerce salience, D2C brands, and a fair share in newer distribution models.

Note: These recommendations are from various analysts and are not recommendations by Trendlyne.

Now that we are in the Q4 earnings season, investors will want to know expectations for the upcoming results. We looked into Trendlyne’s Forecaster data to see which sectors analysts predict will do well in Q4 and FY23.

The key sectors analysts are bullish on (in terms of growth and share price targets) are IT - specifically mid-tier IT companies - capital goods, agrochemicals, capital markets, and banking. The rise in capital spending, digitization push and opening up of export opportunities are driving growth for these sectors. 

In this week’s Analyticks:

• Growth in the middle: Demand outlook for mid-tier IT companies looks strong in FY23
• Revival in private capex: Spending to go up for capital goods sector
• Export surge: Agrochem players will gain in current geopolitical situation
• Mid-sized banks to grow at a faster pace in FY23
• Steady ship for capital market players: Earnings growth to moderate, but remain steady in FY23

Let’s get into it.

Mid-tier IT cos likely to outrun larger peers in growth 

The IT sector is likely to see strong demand in the coming quarters, despite the slowing global economy. According to analysts like Prabhudas Lilladher and Axis Securities, deal momentum will be robust in Q4FY22. Interestingly, mid-tier IT companies like Coforge, Persistent Systems and Mphasis may grow at a faster pace vis-à-vis top tier companies  like Infosys and HCL Technologies. 

Analysts expect this mid-tier group to see 3.9%-8.5% QoQ revenue growth in Q4FY22 on a constant currency basis. On the other hand, top-tier IT companies  may only see a 1.4%-5.5% revenue growth sequentially.

Notably, the Jan-Mar quarter is a seasonally weaker quarter for IT services. Despite this, mid-tier companies are expected to shine, as they were able to consistently win small-sized deals in Q2FY22 and Q3FY22, while large deal momentum dried-up for the top players. Analysts at HDFC Securities and Axis Securities expect Persistent Systems to lead top line growth in Q4FY22 owing to a ramp-up of large deals. 

Capital goods makers may gain from healthy order books

The government’s thrust on higher infra spending along with rising private capex via the PLI scheme drove the growth for the capital goods sector in 9MFY22. In fact, according to ratings agency ICRA, the order book for both original equipment manufacturers (OEM) and EPC companies is at the highest levels in six years. OEMs also have healthy revenue visibility for Q4FY22 and FY23 with their order book to order inflow ratio at 0.87X as on December 31, 2021. 

Back in Q3FY22, ABB India and Siemens saw strong traction for short-tenure projects. The demand for ABB India’s products were driven by sectors like renewables, water and wastewater, data centres and railways. ABB India's focus is also to invest more capital in highly efficient electric motors and drives, which optimise energy utilisation. Hence, the demand from the renewables segment will continue to be strong in FY23. 

Siemens saw robust demand for waste heat recovery systems from end-user industries like steel, cement, chemical, pharma and fertilisers in Q3FY22. Interestingly, the metals and mining sector is still in a favourable cycle, which bodes well for the company in the coming quarters.

Agrochemical players may gain from a bumper Rabi season in Q4FY22

Harvesting for the rabi season (April to May) is in full swing and farmers are getting better prices for crops like wheat, soyabean, mustard and barley, among others. The prices of these commodities jumped over 35% YoY in April 2022 due to the ongoing Russia-Ukraine crisis and export demand. This is likely to boost farm incomes in H1FY23. Notably, Russia and Ukraine are major exporters of wheat, sunflower, barley, rapeseed, millets and maize. Trade sanctions on Russia and fall in exports from war-torn Ukraine are likely to open up export opportunities for Indian farmers.

Agrochemical players like PI Industries, UPL and Sharda Cropchem may see higher demand for their products as farm incomes and cash flows are set to rise in coming months. Notably, these companies manufacture formulations and active ingredients that are used in fungicides, herbicides and insecticides. 

Philip Capital expects agrochemical companies to sustain their EBITDA margins, as they will be able to transfer the burden of higher input costs to farmers in H1FY23 (post rabi season).

Moreover, Kotak Securities believes that these agrochemical exporters are likely to benefit more from the positive global agri products cycle compared to their domestic counterparts. The net profits of these players may rise close to 19% YoY (on an average) in FY23, backed by higher export demand and sales realisations. 

Banks to report better incomes, lower provisions and higher net profits in FY22

For most banks, loan advances picked up pace in Q4FY22. With the earnings season coming up, this growth in loan advances will show up in the net interest income (NII). ICICI Securities’ suggests that private banks’ NII is likely to grow 20% YoY in FY22.

Brokerages like Axis Securities, ICICI Securities, and Motilal Oswal expect loan growth to boost NIIs for IndusInd Bank, Bank of Baroda, and CreditAccess Grameen Bank in Q4FY22E. According to Trendlyne’s Forecaster results, these mid-sized banks are set to grow at a decent rate both in Q4FY22 and FY23.

Reducing provisions to boost profits 

Provision norms have to be followed by all banks to safeguard their assets, in case they turn into non-performing assets (NPAs). The pandemic forced banks to allocate an additional provision for the Covid-19 event. This ate up the earnings of most banks, which reflected in the fall in net profits, and in some cases, losses.

However, with economic activity picking up pace and business returning to normal, banks are reducing these additional provisions. Emkay Global suggests that with the reduction in NPAs and better recovery rates, net profit numbers may get a boost in Q4FY22.

With the mild effects of Omicron and Q4 being a seasonally busy quarter for the sector, earnings are likely to be strong for Q4 and continue into FY23 as well.

Capital market players to benefit from higher retail activity and IPO issuances in FY23

Easy liquidity in markets, low interest rates and attractive equity market returns added to the market frenzy in 2020-21. The primary beneficiaries of these trends were capital market companies like BSE, Central Depositary Services (India) (CDSL), and Crisil. 

The above companies are set to finish FY22 on a happy note with over 50% YoY growth expected in Q4FY22 revenues on an average, according to Trendlyne’s Forecaster data. However, rating agency ICRA believes that the earnings growth for this space is set to moderate in FY23. Analysts see the average YoY net profit growth for Crisil, BSE, CDSL to taper off to 15% in FY23 from 60%+ in FY22. 

Interestingly, the outlook for the primary market (IPO) looks robust for 2022 and is set to pick-up further after the LIC initial public offering opens (around April-May 2022). According to news reports, close to 35 companies already have SEBI’s approval to raise Rs 50,000 crore, while another 33 companies will apply to the stock market regulator to raise another Rs 60,000 crore in 2022 (excludes LIC). 

Although the growth forecasts are lower for FY23, capital market companies (including broking companies) will continue to witness steady growth in the longer-term. India still has a long way to go in terms of stock-market coverage. According to HDFC Securities, only 5.8% of the Indian population had demat accounts at the end of February 2022, while this figure is 13.5% for China.