The corporate earnings for the September quarter were stronger than expected with big beats and upgrades. The companies benefitted from low raw material costs and realised operating leverage benefits.
With an upgrade to downgrade ratio of 4:1, this has by far been the best earnings season in many years. The net profit of Nifty50 companies increased by double digits compared to muted expectations and revenues also rebounded at a faster pace than costs post the lockdown, analysts said.
"The September quarter (2QFY21) corporate earnings season was a blockbuster one, with big beats and upgrades across our coverage universe. With an upgrade (>5%) to downgrade ratio (<-5%) of 4:1, this has by far been the best earnings season in many years," domestic brokerage house Motilal Oswal said in a report.
Around 63 percent of the companies in MOFSL Coverage Universe beat 2QFY21 estimates, while 18 percent reported below estimate results. This has resulted in the first material earnings upgrade for Nifty EPS estimates in many years.
More importantly, corporate commentaries across the sector suggest continued demand recovery in Q3FY21, underpinned by a healthy start to the festive season, it said.
While sales growth was in-line, better-than-expected demand recovery, continued cost control measures, and lower-than-expected provisioning costs for the BFSI segment drove a spectacular profit beat.
"Nifty sales declined 6.7 percent YoY (est. -5.2 percent), while EBITDA/PBT/PAT reported growth of 8%/14%/17% YoY (est. -0.3%/-7%/-5%). 62 percent of Nifty-50 companies reported a beat on our PAT estimates, and only 18 percent posted results below our expectations," the report said.
Among sectors, cement, private banks, PSU banks, healthcare, oil & gas (O&G), technology, and utilities reported YoY profit growth, while auto, capital goods, consumer, NBFC, and retail reported YoY declines. The telecom sector posted a loss.
Amar Ambani, senior president and head of research - institutional equities at Yes Securities said the sharp recovery for many companies in Q2FY21 results is nothing short of impressive.
"Barring few stressed sectors like aviation and multiplexes, the scene is highly encouraging. While many businesses have grown on a year-on-year basis, many others are only 10-20 percent below pre-Covid levels. Banks also resumed lending and many didn’t feel the need for high Covid related provisioning," Ambani said.
He is of the view that the banking sector now looks in much better shape unlike what was feared, given the growing collection efficiency, adequate provisioning, and the fresh capital cushion lent to balance sheets. He believes that Q3 will also be a good one.
Meanwhile, HDFC Securities noted that markets would now focus more on QoQ trends in revenues and costs given the positive base effect from Q4. Given the sharp rally in markets and Nifty valuations at 21x FY22 PE, absolute upsides look capped at the index level, it added.
Given the sharp rebound in the market from March lows, analysts believe that Nifty valuations are no longer cheap. The present value is already pricing in much of the positives and hereafter needs consistent support in terms of earnings delivery.
Motilal Oswal says overweight on BFSI, IT, healthcare, auto, and telecom and neutral on the consumer in its model portfolio.
The brokerage firm prefers these 10 large-cap stocks post Q2 results that include Reliance Industries, Infosys, Hindustan Unilever, ICICI Bank, Bharti Airtel, SBI, Titan Company, Divi’s Laboratories, Hero MotoCorp, and Muthoot Finance.
Among midcaps, it prefers Motherson Sumi, Ipca Labs, AU Small Finance, Mphasis, Crompton Greaves Consumer Electricals, Emami, LIC Housing Finance, ICICI Securities, Aditya Birla Fashion, and India Energy Exchange.
(Edited by : Jomy)