September has been a strong quarter, beating expectations across most sectors, led by margin surprises and in-line revenue performance. The net profit of Nifty50 companies increased by double digits compared to muted expectations and revenues rebounded at a faster pace than costs after the lockdown, resulting in robust earnings.
In a recent report, HDFC Securities noted that 65 percent of stocks in its coverage of a total of 150 stocks saw earnings upgrades for FY21 and FY22 after their Q2 results. Also, 70 percent of those 150 companies beat expectations in the quarter.
"Given Q2 trends and management commentaries for our coverage universe, we have seen aggregate PAT change by ̃4.1 percent and over 2.4 percent for FY21 and FY22, respectively. We are now building in over 3.3 percent and 37.1 percent YoY growth for aggregate PAT for FY21 and FY22, respectively. Nifty consensus EPS for FY22 has also increased by ̃2-3 percent post Q2," the brokerage stated.
It also noted that markets would 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 index level, it added.
However, the brokerage still sees a favorable risk-reward on the economy-facing sectors and spotting bottom-up investment ideas across sectors for the next 12-24 months.
Its preferred sectors continue to be IT, Chemicals, Pharma, Telecom, Insurance, large Banks, Cement, Durables and Gas while it remains underweight on Consumption (Staples, Discretionary and Autos).
Top large-cap picks in the model portfolio include Infosys, ITC, SBI Life, ICICI Bank, Axis Bank, L&T, Bharti. Within mid-caps, it likes Mphasis, Max Life, IGL, Radico, Gujarat Gas, Crompton Consumer, Alkyl Amines, Galaxy Surfactants, JK Cement, and KNR Construction.