One of reasons for the recent rally in the market was June quarter earnings season which was supposed to be a washout given the lockdown imposed by the government to control the spread of novel coronavirus.
But quarterly numbers reported by most sectoral leaders were either above or in line with estimates that were already low.
The decline in moratorium period along with lower non-performing assets supported banks; demand for essential commodities and hygiene products along with lower oil prices drove FMCG; work-from-home proved to be strong for IT companies; high data consumption during lockdown helped telecom companies; increased focus on health boosted pharma segment.
Hence, experts revised earnings estimates of companies upwards for FY21 by a few percentage points. They expect healthy double-digit growth in FY22 obviously on low base of previous year.
"The June quarterly results have been above expectations, mainly due to very low estimates. The surprise has come on two counts: revenue estimates were very low, on which there has been a slight beat, and expenses have been way below estimates, mainly due to drastic cost-cutting measures taken by companies. We have seen around 5-6 percent improvement in FY21 Nifty50 estimates between pre and post-result season," Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities told Moneycontrol.
As compared to earlier single-digit earnings de-growth, we are now building in around 1 percent earnings growth for Nifty50 companies in FY21, he said.
Gautam Duggad of Motilal Oswal in his earnings report card also said their FY21/FY22E Nifty EPS estimates have been marginally revised upwards by 2.1/2.7 percent to Rs 477/664 (prior: Rs 467/647). "We now expect FY21 Nifty EPS to grow 2.4 percent YoY."
"Cost control and cash preservation were effectively deployed as tools to offset the headwinds from the lockdown induced volume declines. Just 6 percent EBITDA decline in the Nifty (despite 30 percent revenue decline) is a testament to the ability of India Inc. to drive cost control when needed. As the lockdowns are eased and demand recovery takes shape gradually, we expect the commentaries to improve," he added.
Experts picked 18 stocks that can be considered for investment based on June quarter earnings performance.
IT and pharma remained common themes preferred by experts after quarterly earnings.
Vineeta Sharma, Head of Research at Narnolia Financial Advisors
Some of the sectors that look promising post Q1 numbers are:
1) Information Technology companies as total contract values (TCV) remain for most of the companies and demand towards digitization remains the key driver for the industry - Infosys and HCL Technologies
2) Some EPC companies like KNR Construction and PNC Infratech which revenues and net profits are better than streets expectation on account of better execution.
3) Select pharma companies like Alembic Pharma and Dr Reddy's Labs are both gave results better-than-expectations and are trading at reasonable valuations.
4) Farm equipment as there has been a good monsoon and better Kharif sowing along with bumper Rabi crops - Escorts and Balkrishna Industries
Sanjiv Bhasin, Director at IIFL
IT, pharmaceuticals, auto, consumer electricals & reality are sectors to bet on.
IT is biggest beneficiary of work-from-home which is a trend to stay & reduces costs & increases return on equity.
In case of pharma, globally the pandemic has seen the return of pharma stocks as people stock up on medicines with the search for vaccine getting stronger by the day & Indian companies being re rated for free cash flows improving along with brand visibility & contract manufacturing.
Auto is a no brainer as rural incomes rise with shared mobility & public transport taking a back seat.
In case of consumer electricals, sitting at home has seen maximum electrical consumption & wear/tear which is seeing electrical companies like Havell raises prices across the board.
With Gold getting untouchable by the day, smart money will buy fixed assets with reality making a big comeback as wealth effect sees increase in sales of both low cost & high end reality.
Ideas are TCS, Bharti Airtel, Sun Pharma, Havells India, DLF and Ashok Leyland.
Gaurav Garg, Head of Research at CapitalVia Global Research
Based on the June quarter earnings, pharma and IT sectors can be considered by investors for long term investment as they are backed by robust fundamentals, growth prospects and strong product pipeline. These sectors being defensives were less impacted by the coronavirus disruption as compared to other sectors.
IT sector growth seems to be driven by government initiatives like Digital India in the near future. Pharma is a heterogeneous sector and each company has its own strategy. The opportunities for firms in this sector may be due to policy initiatives or advancements in terms of vaccines or medicines for COVID. The long term growth prospects seem to remain positive for these sectors and investors are advised to buy stocks on dips based on stock specific criteria.
In the pharma sector, Jubilant Life Sciences and Ajanta Pharma can be good picks for long term considering their fundamentals aspects like P/E, ROCE and valuation. Both the firms reported stellar performance in the previous quarter. Jubilant Life Sciences Limited has launched the COVID-19 treating drug remdesivir under the brand name 'JUBI-R' in the Indian market recently. These stocks might continue to remain attractive for a long period and hold the potential to generate decent returns.
In the IT sector, L&T Technology Services and Tata Elxsi can be considered for longs as both the stocks have posted surprising results. L&T Technology Services limited has expanded its collaboration with Microsoft Corporation in order to transform buildings into future-ready smart campuses. Tata Elxsi is focused on expanding the communications and healthcare verticals and has the right set of products/services to address the market opportunity through its collaborative approaches. Investors are advised to avoid aggressive longs and buy in a staggered manner instead.
Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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