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Growth returning after 3 quarters, says Jefferies

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The September quarter witnessed a faster than expected recovery in the corporate earnings amid the COVID-19 shock. The companies benefitted from low raw material costs and realized operating leverage benefits with positive management commentary on the pace of demand recovery.

Growth returning after 3 quarters, says Jefferies
The September quarter witnessed a faster than expected recovery in the corporate earnings amid the COVID-19 shock. The companies benefitted from low raw material costs and realized operating leverage benefits with positive management commentary on the pace of demand recovery.
Among sectors, banking and finance sector saw improvement in business activity. Ahead of the festive season, consumer demand lifted volume growth for the FMCG sector along with automobile companies.
According to Jefferies, earnings for its coverage universe returned to growth after a gap of 3 quarters, with pre-exceptional earnings up 16% during September 2020 quarter. Of the 103 Q2 result notes Jefferies analyzed from its coverage universe, 75 percent or 77 results came above analyst estimates and it raised estimates for 78 percent or 80 of them. 41 companies i.e. more than half of the 80 upgrades had more than 10 percent upgrades to their FY21 EPS.
“The overall upgrade to downgrade ratio was 5:1. A high proportion of stocks in the financials, cement, metals, oil & gas and several industrials saw double-digit earning upgrades. Nifty consensus earnings for FY21/22 are up 3.2%/2.5% since their bottom a few weeks back,” the global brokerage said in a report.
Profit & Loss analysis of Jefferies’ coverage universe for the quarter shows that pre-exceptional net profit for the universe grew at 16 percent YoY, its fastest pace in 6 quarters and a remarkable recovery from a 39 percent decline in June 2020 quarter.
Excluding the volatile global cyclicals (O&G, metals) and Finance (earnings double YoY), the earnings growth was just 1% YoY, though much better than declines seen in last 2 quarters, it said.
Revenues for the coverage (ex O&G, metals, finance) were +3 percent YoY, a sharp reversal from the 20 percent decline in June quarter. Ebitda increased at a sharper pace of over 10 percent YoY as margins climbed 160 bps YoY or by 30 bps QoQ to at least a 14 quarter high 24.8 percent.
The margin performance was best visible in the IT and pharma sectors with margins up 290 bps and 420 bps YoY, respectively.
Further, the brokerage noted that the domestic companies saw a profit decline of 7 percent YoY, as sectors such as autos, cap-goods/infra and property posted double-digit earnings decline. The revenues were flat YoY and Ebitda up 1 percent. Ebitda margins held up reasonably well, up 10 bps YoY/20 bps QoQ to around 14 quarter high levels of 21.4 percent.
Among sectors, financials posted a strong quarter with pre-ex earnings doubling YoY. Lower incremental NPL formation and adequate buffers led to lower provisioning, according to Jefferies.
The cement sector posted a sharp 69 percent pre-ex profit growth with profits up 20-90 percent. Pharma sector continued its good run with third consecutive quarter of double-digit profit growth, indicating likely sustained turnaround.
Earnings for the cap-goods / contractors / property companies were down 10-20 percent YoY due to labor challenges impacting execution. However, the brokerage sees an improvement going ahead with labor levels back to normal by November-December.
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