India enters the results season with Avenue Supermarts announcing its results on January 8, followed by big tech companies like TCS, Infosys and Wipro announcing their results on January 12. The results season will likely be difficult for a number of reasons. For the third quarter earnings season ending December 21, IIFL Securities will perform detailed coverage of 300 of India’s most valuable listed companies by market capitalization. We won’t be using any index this time around, but we will stick to the highest market cap stocks according to AMFI.
Why will the third quarter results be difficult?
There are a number of reasons the earnings season is likely to be tough. Here are some key factors that will affect the results.
What to expect in the third quarter from the various sectors?
Despite input cost pressures, second quarter profit growth remained robust at over 54% year-on-year and 24% sequentially. How would the sectors perform in the third quarter?
a) The FMCG industry is likely to experience a mix of skyrocketing revenue growth and limited earnings growth. The top line growth will be largely attributed to the holiday season, but commodity inflation will continue to haunt results. Crude was $ 75 / bbl in the second quarter and is closer to $ 80 / bbl in the third quarter.
b) Auto stocks have been in a tough spot and little has changed. Most automakers, with the exception of Tata Motors and M&M to some extent, have been under constant pressure on monthly sales growth. Not just wholesale shipments, but even retail sales have been affected by customer cautiousness. The microchip shortage is improving, but that will be in March 2022 when automakers can resume normal production.
c) The IT sector will again be the sector to watch. They still contribute a portion of the rupee profits of the Nifty 50 universe. During the December quarter, most of the major IT companies saw strong growth in business IT spending. Numerical allocations and discretionary allocations were higher. But the wild card in the bunch could be the mid-cap IT companies that could really surprise on the upside.
d) In the banking space, PSU banks will continue to benefit from lower provisioning during the December 21 quarter. However, early indications of loan and deposit growth show that private banks may also have had a strong December quarter. Private banks are expected to see strong traction in retail banking, SME banking and wholesale banking in the third quarter.
e) It will likely be another strong quarter for cement inventories. The pricing power of cement has been with manufacturers in the second quarter and this is expected to continue into the third quarter as well with an average peak of cement achievements up 2%. In addition, although freight costs may still remain, most cement plants will benefit from the reduction in electricity costs. At the top level, a strong recovery in residential housing will stimulate demand for cement.
f) Health care stocks are likely to be a sort of mixed bag. Price pressure and margin squeeze in US markets likely continued into the December 21 quarter. Pharmaceuticals stocks with a strong presence in the US will continue to come under pressure, but pharmaceutical stocks with an emerging presence will do much better in the December 21 quarter.
What does the overall picture for the third trimester look like?
The December 21 quarter is expected to face pressure on two fronts. First, input costs in many sectors have stabilized but have hardly declined. Second, bond yields climbed 35 to 40 basis points in the December 21 quarter, pushing up the cost of funds. This is also likely to put pressure on the bottom line.
Bloomberg estimates a 1.2% drop in sequential revenue and a 5.6% drop in sequential earnings in the December 21 quarter. In a way, many energy companies reported unusually high profits in the previous quarter due to the rise in crude prices, which resulted in inventory conversion gains. This is unlikely to happen again in the third trimester.
The good news is that even with this normalization of earnings and sales, Nifty companies should be on track to hit Rs.873 EPS by the end of fiscal 23. This should make current valuations much more palatable. . But that’s a whole different story!