The March quarter was a rather disappointing one for India Inc as both top line and the bottom line suffered After the country was put in lockdown in the 10 days of March.
“Nifty sales declined 5.1 percent YoY (against estimates -10 percent), while EBITDA/PBT/PAT declined 4.8/28.6/20.1 percent YoY (versus estimates of decline 8.8/21.2/-20). PAT was dragged by Autos, Oil and Gas (O&G), Metals, Private Banks and NBFCs. We have treated impairments by O&G and Commodity companies as an exceptional item,” said Motilal Oswal.
Sales for both the Nifty and MOFSL Universe declined for the third consecutive quarter, dragged by Automobiles, Metals, O&G and Cement, it added.
In fact, most sectors reported a double-digit decline in profits with defensives like healthcare, technology and consumer sectors being the only exception.
Motilal Oswal’s Universe sales/EBITDA/PBT/PAT declines stood at 5/6/32/22 percent YoY (versus estimates decline of 9/9/22/25 percent), while HDFC Securities Institutional Research said Q4 FY20 miss itself led to around 12 percent cut in its coverage FY20 aggregate PAT and earnings misses were highest in Financials (Banks, insurance), consumer discretionary and Energy sector.
As the corporate commentary after Q4 FY20 was expectedly not very enthusiastic and many companies avoided giving guidance for June quarter as well as FY21 due to uncertainty led by pandemic behaviour, brokerages largely see double-digit decline in full-year FY21 earnings and are hoping for better growth in FY22 on lower base and no COVID-like crisis again.
Both Motilal Oswal as well as HDFC Securities still sees downside risks for FY21 earnings estimates given the multiple moving parts and uncertain underlying demand backdrop, though both assumed that overall economy may return to normalcy by September-end given the normalcy in rural parts of India. Key cities are still struggling with COVID infections.
However, HDFC Securities believes achieving 80-90 percent normalcy would be easy but reaching back to 100 percent activity level and beyond would be a challenge and slow grind. Hence, it expects a high likelihood of further cuts to FY21 and FY22 earnings over the next 6-12 months.
Meanwhile, the rally in Nifty and Sensex of more than 41 percent from its March 23 low point indicated that the market could be looking beyond FY21 with the feeling that there could be no issue of virus in FY22 and as a result, there could be normalcy in earnings and economic growth especially after the rural parts of India remained less affected by the pandemic and were supported by normal monsoon expectations, strong rabi season and robust kharif sowing and government’s focus on MGNREGA.
Brokerages feel with the rally, the market’s valuations turned little higher than long-period average and hence they advised being cautious and be selective in stocks which can fight this crisis.
“Near-term earning predictability has been impaired and hopes have now shifted to potential FY22 earnings recovery. After the rally from March 2020 lows, the Nifty at 20.6x P/E is now trading at a slight premium to its long period average and is not looking as attractive as it was in March. Further upside, now rests on the inter-play of Health crisis and restoration of normalcy in the economy. We advocate a more cautious/defensive portfolio positioning,” Motilal Oswal said.
So after Q4 earnings season and the recent market rally, Motilal Oswal is bullish on select largecaps such as ICICI Bank, Bharti Airtel, Infosys, HUL, HDFC, Dabur, M&M, Reliance Industries. Meanwhile, Aditya Birla Fashion, Tata Consumer Products, Crompton Consumer, Alkem Labs, L&T Infotech, Gujarat Gas, Jindal Steel & Power and Motherson Sumi are there picks from the midcap space..
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Disclosure: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd which publishes Moneycontrol.