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Last Updated : Jul 20, 2020 11:11 AM IST | Source: Moneycontrol.com

Q1 numbers an aberration; focus on outlook, management commentary, say experts

The Q1FY21 earnings season kick-started with IT players, whose numbers have been mixed, showing the stress of COVID-19 but management sees Bette days ahead.


The June quarter earnings will be an aberration because of unprecedented disruptions caused by the coronavirus pandemic, analysts, brokerages and investors say.

IT players, which kick-started the Q1FY21 earnings season, have thrown up mixed numbers, underscoring the COVID-19 stress but management sees light at the end of the tunnel.

"The revenue impact of the pandemic played out broadly along the lines we had anticipated at the start of the quarter. It affected all verticals, with the exception of life sciences and healthcare, with varying levels of impact. We believe it has bottomed out, and we should now start tracing our path to growth," Rajesh Gopinathan, CEO and Managing Director of TCS, said when the Q1 earnings of the company were announced on July 9.

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IT companies such as Infosys and Wipro are among a few who witnessed healthy traction last week and gave what looked like a good start to the earnings season.

These companies surged on the back of sound operating margin expansion and future growth guidance in the range of 1-2 percent, Jimeet Modi, Founder & CEO of Samco Group, said.

"Although growth expectations are still in line with the past trajectory, the cost reduction trigger has re-rated IT stocks in India,” he said.

The IT players’ earnings brought about renewed confidence in D-Street, which was supposedly staring at a washout quarter. “Going forward, it is expected that such performances will be largely discounted with a kneejerk reaction without significant price movements," Modi said.

The road ahead

Barring few exceptions from some IT, telecom, pharma and banking players, the Q1 numbers are expected to be low due to COVID-19. In light of this, experts advise treating the numbers as aberrations and focus more on the outlook and management commentary.

Rusmik Oza, Executive Vice President & Head of Fundamental Research at Kotak Securities, is of the view that the Q1 numbers are bound to be disappointing for many sectors on account of the pandemic.

"Investors acknowledge the negative impact and are willing to look beyond Q1 numbers. Investors on their own will not be able to gauge the impact and path of recovery. In this regard, management commentary and expectation could throw some light on the way forward," Oza said.

Now, everyone is expecting businesses to go back to normal in the next one or two quarters but as the number of cases in India is still rising, it is difficult to ascertain how much demand will come back in Q2.

"As of now, it is safe to assume demand to resume from Q3 onwards and further accelerate in Q4. Hence, on a year-on-year basis, it is ideal to assume subdued earnings in the first half and improved earnings in the second half of FY21," said Oza.

Jyoti Roy, DVP- Equity Strategist, Angel Broking, also thinks that markets will focus more on management commentary and outlook rather than the Q1 numbers, which are going to be hit for most sectors due to lockdown.

"Though there was a sequential improvement in May and June, overall economic activity for the quarter would be well below Q1FY20 levels. Markets have already baked in significant degrowth in Q1 numbers and would be more focused on management outlook and guidance for the future," Roy said.

The most important point for investors is to wait and assess how things pan out in the coming months and quarters.

"Market is working with muted expectations for Q1 except for the banking sector. What is relevant is how the situation pans out on a month on month basis, as April and May have been washout months for most companies," said Hemang Jani, Head – Equity Strategist, Retail Broking, Motilal Oswal Financial Services.

"As there is a revival in the month of June, it remains to be seen if we see that trend panning out for the next few quarters. In this context, it would be crucial to hear from the management how the situation is panning out for the rest of the quarters."

Jani said there were lots of moving parts and the demand recovery was uncertain. The second wave of COVID has been hitting many parts of the world and there was a possibility of lockdown or restrictions being imposed.

"Only pockets with visibility are telecom and rural focussed companies. We believe earnings estimates would remain volatile in the near-term with the risks to earnings estimates remaining on the downside," he said.

Since Unlock 1.0, economic activity has been picking up gradually, which may push the numbers higher in the upcoming quarterly results. However, a healthy recovery is unlikely.

"Given that economic activities have improved significantly since Unlock 1.0, we expect sequential improvement in numbers for most sectors, though the recovery in earnings is going to be uneven with few sectors continuing to report depressed earnings for the next quarter as well," Roy of Angel Broking said.

Sectors which were essential or more rural-focussed like agrochemicals, consumer staples, two-wheelers and tractors would report quicker recovery in earnings. “We also expect most of the large IT companies to report sequential growth from next quarter, which is in line with management commentary post the Q1 numbers," Roy said.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
First Published on Jul 20, 2020 11:11 am
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