Investors building in high hopes from Q2 earnings; can tepid numbers spook market?

IT bellwether Tata Consultancy Services (TCS), on October 7, posted better-than-expected September quarter earnings.

The company's profit after tax came in at Rs 7,475 crore for the quarter ended September 2020 against Rs 7,008 crore in the previous quarter. A CNBC-TV18 poll had estimated the number to the tune of Rs 6,744 crore.

Consolidated revenue from operations for the quarter stood at Rs 40,135 crore, higher than the Rs 38,322 crore reported in the June quarter of FY21 and a CNBC-TV18 poll of Rs 39,330 crore.

TCS has set an optimistic tone for Q2 earnings and perhaps bolstered the expectation that the Q2 numbers will be at least healthy, if not stellar.

Companies like TCS are known for healthy earnings. For the September quarter of FY21, even though the company's numbers were slightly lower on yearly basis, it showed the trend of rapid recovery, resilience and growth. What else does the market need?

There seems to be a widespread hope that the September quarter numbers will show strong emergence of India Inc. from COVID-19 gloom.

The hope is underpinned by the fact that the June quarter earnings came out on a decent note despite the strong disruption caused by COVID-19.

Kotak Institutional Equities (KIE), in a report, said it expected Q2FY21 net profits of its coverage universe to increase 16 percent year-on-year (YoY), led by banks (low slippages), IT services (reasonable demand trends across large verticals), metals and mining (increase in realisations) and pharmaceuticals (recovery in the US revenues).

"Sequentially, we expect profits of KIE universe, BSE30 index and Nifty50 Index to increase 69 percent, 32 percent and 52 percent, respectively, on account of a sharp increase in economic activity reflecting the easing of

lockdown restrictions in Q2FY21," Kotak said.

Kotak, however, expects a YoY decline in net profits of several sectors due to low demand, weak execution and high base effect due to corporate tax rate reduction in Q2FY20.

On a YoY basis, Kotak expects net profits of the Sensex to decline 1.3 percent and that of the Nifty50 index to increase 0.6 percent.

"We estimate EPS of the BSE30 index at Rs 1,555 for FY21 and Rs 2,028 for FY22 and of the Nifty50 index at Rs 453 for FY21 and Rs 606 for FY22," Kotak said.

Sahil Kapoor, Chief Market Strategist at Edelweiss Investment Research told Moneycontrol that the September quarter is likely to be better than the June quarter but many sectors are likely to see a year-on-year contraction.

"The companies which were able to rationalise cost may show some stability emerging in the bottom-line but sales are likely to see a continued impact from COVID-led disruption," Kapoor said.

Tepid Q2 numbers may cause some degree of disappointment but it is unlikely to trigger any selloff in the market, experts believe.

The earnings can trigger sector and stock-specific volatility but it may not spook investors and the market may not see a knee-jerk reaction as it will keep macroeconomic factors and US elections also in focus.

"I do not think we will see a sharp correction in the market. The volatility that we see in the market is largely related to global factors, especially the US. Typically, before elections, we see a 6-10 percent of a crack in the market. We have already seen a similar kind of crack," said Pankaj Pandey, Head of Research- ICICI Direct.

Pandey hinted even though the market expects better earnings, especially from IT and pharma, there are some pockets that have not been doing well such as banking, infrastructure and other capital-intensive sectors. Earnings of those may get revived probably by next year.

More than the numbers, it will be the prospects of growth that the market is expected to focus on. With economic indicators improving and encouraging reports of vaccine trials, the market may be factoring in a rapid revival of consumption and demand.

Unless an unexpected even occurs, tepid Q2 numbers of some pockets may not derail the rally of the market, experts said.

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