Stellar Q2 show: Brokerages see a 6.4% earnings upgrade in FY21

The September quarter earnings, so far, have turned out to be strong and brokerages and analysts are of the view that we could see earnings upgrade beginning this quarter.

"Q2FY21 has been a blockbuster earnings season, with big beats on aggregates and improved management commentaries. Nifty profits for the 32 companies that have posted their results have grown 24 percent year-on-year (YoY) against the expected 1 percent decline," said brokerage firm Motilal Oswal Financial Services.

Brokerages and analysts point out that the unlocking of the economy and pent-up demand is helping things to get back to normal which is resulting in healthy earnings.

Atish Matlawala, Senior Analyst, SSJ Finance & Securities, is of the view that the unlocking of the economy in a phased manner has helped companies to slowly march towards normalcy and post decent numbers in the September quarter.

"As we move towards normalcy, earnings are expected to move higher. Therefore, we will see more earnings upgrades in times to come, unless covid infections spiral and the government is forced to enforce stricter lockdowns which are beginning to happen in European countries," said Matlawala.

Jyoti Roy, DVP Equity Strategist, Angel Broking, too, foresees upgrades. "Till now most of the companies have either declared numbers which were in line or ahead of estimates. So, we feel that there are going to be earnings upgrades post the Q2 numbers, especially in the backdrop of accelerating economic activities," Roy said.

The 32 Nifty companies (with already declared results) have reported growth in sales at (-9) percent, EBITDA at 14 percent, PBT at 14 percent and PAT growth at 24 percent.

"Seventeen Nifty companies have beaten our expectations, while seven have missed. The breadth of earnings beat and consequent earnings upgrades has been the best in recent memory," Motilal Oswal said.

Motilal Oswal said the earnings upgrade/downgrade ratio for Q2FY21 is skewed in favour of upgrades.

"There has been a 6.4 percent/3 percent upgrade in FY21/FY22E Nifty EPS estimates to Rs 485/Rs 670 (from Rs 456/Rs 651). We are now building in Nifty EPS growth of 4.2 percent for FY21E," Motilal Oswal said.

"Fifty-two companies of the Motilal Oswal universe have reported upgrades of more than 3 percent (of which 28 companies have seen upgrades of more than 10 percent), while 17 have posted downgrades of more than 3 percent," Motilal Oswal said.

The brokerage said among the Nifty constituents, Asian Paints, Hindustan Unilever, Nestle, Axis Bank, ICICI Bank, IndusInd Bank, Kotak Mahindra Bank, Bajaj Finserv, Dr. Reddy’s Labs, JSW Steel, Bharat Petroleum, Indian Oil, Reliance Industries, Infosys, Tata Consultancy Services, Tech Mahindra and UPL have exceeded its profit estimates.

On the flip side, Bajaj Auto, Hero MotoCorp, Maruti, Larsen & Toubro, HDFC Life, Titan, and Bharti Airtel have performed lower than expected, Motilal said.

Axis Bank (16.6 percent), Bajaj Finance (14.5 percent), Kotak Mahindra Bank (13.8 percent), Tata Motors (12.8 percent), Infosys (11.6 percent), JSW Steel (11.1 percent), ICICI Bank (9.5 percent) and IndusInd Bank (7.8 percent) are the top FY22E upgrades, Motilal Oswal said.

Tech Mahindra (-11.2 percent), Hero MotoCorp (-6.5 percent), Hindustan Unilever (-3.3 percent) and Larsen & Toubro (-3.1 percent) are the top FY22E downgrades, as per the brokerage.

Sharper-than-expected underlying demand recovery in multiple sectors, better-than-expected pricing power/realisation, continued cost optimisation initiatives and lower-than-expected provisioning costs in BFSI are among the main reasons behind the stellar earnings.

"Corporate commentaries have turned better, with consumer and consumer discretionary companies guiding for improved demand in the festive season, IT companies highlighting robust and growing deal pipelines, and BFSI demonstrating improved collection efficiency/disbursement trends and guiding for controlled restructuring ahead," Motilal Oswal said.

Signs of improvement in the macroeconomic health of the country have bolstered hopes that company earnings will be better in the coming quarters.

India is in the middle of a V-shaped recovery from the pandemic lows, which is reflected in high-frequency indicators like PMI and auto sales numbers.

The manufacturing PMI has accelerated to 58.9 in October from 56.8 in September while the services PMI, too, has accelerated to 54.1 from 49.8.

"It is possible for earning upgrades and even some GDP upgrades in December," said Sameer Kalra, Founder, Target Investing.

Kalra, however, said a lot of pending and inventory build-up demand and whether that sticks through Q4 or not is the main point to be seen.