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Q2 preview: Earnings growth likely to be skewed

Although overall earnings growth is expected to be strong, analysts expect it to be driven by a handful of sectors.

October 07, 2021 / 08:54 PM IST
 
 
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As the Q2 earnings season starts tomorrow with TCS setting the ball rolling, market experts expect an overall healthy earnings growth of about 32-35%. But a majority of the growth is expected to come from the banking, metals, and exports of IT services and chemicals. Leave aside these high growth sectors, earnings growth for the rest of the pack is likely to be in the range of 10-12%, analyst consensus estimates for Q2 suggest.

Mood is upbeat about the growth in banking, metals, and exports. IT services sector is expected to grow the most (expected over 20%) on the back of an uptick in spending by clients for transformation and cloud adoption, a ramp-up of large deals, and release of pent-up demand.

As per the report from Kotak Institutional Equities, Infosys is expected to raise FY2022E revenue growth guidance to 16.5-17.5% from 14-16% earlier, and HCL Tech is expected to clock 12% revenue growth.

Momentum in demand for chemicals in the export market is expected to continue. Though the industry is witnessing logistical challenges affected by container availability and a sharp rise in freight cost, demand environment will remain robust. The demand from autos, agrochemicals, pharma, foods, and cosmetics remains solid.

As per the report from Edelweiss, Aarti Industries (sales growth 30% YoY) and PI Industries (37% YoY) are likely to witness solid revenue growth on the back of capacity additions and acquisition, respectively. SRF’s technical textiles and packaging films businesses continue to boost profitability on the back of higher commodity prices.

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Banking sector is not expected to show any big negatives on the asset quality and restructuring of loans, there will be a decline in slippages and provisions. Large banks are expected to perform better because of growth in the disbursement of loans, improved net interest margin, and core fee income.

Commodity/Metals are expected to witness a sharp growth in realisations and volume on a YOY basis. Edelweiss' report suggests that the domestic steel demand is showing signs of recovery, prices in the secondary market (ferrous) are up and non-ferrous prices continue to stay robust.

But, the high coal prices can lead to cost escalation. The current power crunch in China will keep the prices on a strong footing which should benefit companies like Tata Steel, Hindalco, SAIL, Vedanta, and Jindal Steel.

Kotak Institutional Securities expects a strong performance from retailing on the back of strong volume growth led by an increase in footfalls post normalisation and operating leverage led margin expansion. Revenue for Aditya Birla Fashion and Retail, Avenue Supermarts, Trent, and Titan are expected to clock robust performances.

The tide seems to have turned down for sectors such as durables, cement, FMCG, and Telecom. Edelweiss expects these sectors to post less than 10% growth at the PAT level due to higher margin pressure.

Auto companies are likely to post a weak quarter due to production issues related to a shortage of chips and higher metal prices. Margins are expected to contract significantly for auto companies.

The capital goods segment is expected to have a moderate quarter on the back of strong execution and availability of manpower compared to last year. Most of the durables and electrical companies are expected to register double-digit revenue growth. However, supply chain bottlenecks could result in some loss of revenue for electrical companies.

YES Securities expects leading capital goods brands to continue to see market share gains led by better distribution reach in both direct sales and e-commerce channels and better product availability in the current environment.

Pharmaceutical earnings are expected to grow at a modest 5% as domestic revenues of many companies will see erosion post COVID. However, acute therapies are witnessing smart recovery and a slew of good launches in US will help report good numbers.

The real estate sector is expected to show strong performance in the second quarter after a weak first quarter. The mood is buoyant because both the residential demand and new launches that were postponed in the last quarter will play a positive role this quarter. Both the residential sales and new launches this quarter have doubled compared to last year. According to the consulting firm Anarock, the top seven cities tracked by the firm have clocked 62,800 units of pre-sales and witnessed 64,560 launches in Q2FY22. Sops given by several state governments on stamp duty augured well for the pent-up demand in the residential segment.

Re-opening of malls post the second wave of COVID will likely see an earnings recovery for retail portfolio in 2QFY22 that will have a positive impact on earnings of DLF, Brigade, Oberoi, and Prestige. DLF and Sobha are top picks for Edelweiss while YES Securities backs Prestige, Sunteck, Oberoi Realty and DLF.

Cement demand started on a strong note in July 2021 benefiting from pent-up demand but got severely hit in September 2021 due to monsoons. Kotak Institutional Securities estimate a 5-7% YOY industry demand growth in 2QFY22. Demand from government infrastructure projects offset weakness in trade demand. Pan-India cement prices at the retail level declined (-2% QoQ, +3% YoY) in 2QFY22 due to seasonality.

Variable costs for cement companies should increase in 2QFY22 led by higher energy and freight costs. Energy costs would increase by 5-6% QOQ as per Kotak, led by higher pet coke prices. Freight costs should also increase by 3-4% with a 3% QOQ increase in diesel prices. They estimate EBITDA/ton to decline by Rs300/ton, 21% QoQ on lower prices coupled with higher variable costs. Edelweiss expects the industry needs to take sharp and sustainable price hikes to pass on the cost impact.

Consensus is for the earnings momentum to continue in the ensuing quarters but will be more skewed in favor of banks, commodities, and exports (IT & Chemicals).

Deepak Jasani, Head of Retail Research, HDFC Securities says, “as the economy picks up and we witness sharp drop in the COVID-19 cases, stability in industrial indicators and ramping up of vaccination coverage, corporate earnings are estimated to improve. Rising exports and increased GST collections also hint at better performance going forward.” He feels that the earnings upgrades could be limited to sectors such as Metals, Oil & gas, Cement, Capital Goods, IT, and Infrastructure.

Q2 Earnings Chart
Gaurav Sharma
first published: Oct 7, 2021 08:36 pm

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