The December quarter earnings, so far, have seen more hits than misses, thanks to a recovery in demand after the opening up of the economy and the significant drop in coronavirus infections.
The cost-saving initiatives and the festival season demand also helped India Inc to post a strong quarterly scorecard. The Q3FY21 earnings have maintained the momentum of the previous quarter.
"There has been a 3.9 percent/2 percent upgrade in FY21/FY22E Nifty EPS estimates to Rs 536/Rs 713 (from Rs 516/Rs 699). We are now building in Nifty EPS growth of 15 percent for FY21E," said Motilal Oswal Financial Services.
The brokerage firm said the profits for the 30 Nifty companies that have posted their results have grown 23 percent year-on-year (YoY) against the expectations of a 4 percent growth.
"For the 111 companies in the Motilal Oswal universe, profit growth stood at 32 percent YoY against the expectations of a 13 percent growth. Some 40 companies from our coverage universe have seen upgrades of more than 5 percent, while just 12 companies have seen cuts of more than 5 percent," Motilal Oswal said.
It said that the 30 Nifty companies have reported average sales at -3 percent (versus estimates of -3 percent), EBITDA at 19 percent (versus estimates of 12 percent), PBT at 25 percent (versus estimates of 9 percent) and PAT at 23 percent YoY (versus estimates of 4 percent YoY).
"Eighteen of these Nifty companies have beaten our PAT expectations, while 5 have missed. On the EBITDA front, 16 have surpassed, 8 have missed, and 6 have met our expectations," said Motilal Oswal.
Moreover, the earnings upgrade-downgrade ratio for Q3FY21 is skewed in the favour of upgrades.
"Forty Motilal Oswal universe companies have reported upgrades of more than 5 percent (of which 20 companies have seen upgrades of more than 10 percent), while 12 have posted downgrades of more than 5 percent," it said.
Among the Nifty constituents, Bajaj Auto, Tata Motors, L&T, UltraTech Cement, Asian Paints, HDFC Bank, ICICI Bank, IndusInd Bank, HDFC, Cipla, Sun Pharma, JSW Steel, IOC, HCL Tech, Tech Mahindra, and Wipro have exceeded the profit estimates of Motilal Oswal.
On the flip side, Dr Reddy’s, HDFC Life, SBI Life, and Bajaj Finance have come up short of the brokerage's expectations.
Vineeta Sharma, Head of Research at Narnolia Financial Advisors, expects earning upgrades in financials, automobiles, staples, and IT and some downgrades in the pharma and oil and gas sectors.
"We have raised targets for Tata Elxsi, Escorts, and Infosys, while upgraded rating and target for Ceat and Bajaj Auto," Sharma said.
The market is trading higher and its valuations would be sustainable only if earnings delivery sustains.
As Motilal Oswal said the Nifty at 20.7 times FY22 EPS is not inexpensive and demands consistent earnings delivery ahead.
"In an otherwise buoyant macro and micro context, rising bond yield may cap equity valuations. Therefore, the earnings delivery assumes greater importance to sustain these valuations," said Motilal Oswal.
Q4 can be even better
Some brokerages believe a strong Q3 may be followed by a further stronger Q4, as the economy has been gradually recovering and demand witnessing an uptick.
Sanjeev Hota, Head of Research, Sharekhan by BNP Paribas, said this is the third quarter in a row of better-than-estimated earnings performance from the majority of the companies and consequently, higher earnings and price target upgrades are being seen in this quarter.
Hota expects the trend to continue as India is still in a recovery mode from the COVID-19 crisis and there could be further positive earnings surprise in store for Q4FY21.
"Though there were the majority of stocks where we have seen earnings and price upgrades, to name a few, ICICI Bank, UltraTech Cement, HDFC, Cummins, Tata Elxsi and one company particularly where we have upgraded our rating and earnings is Tata Motors, which has deliver strong earnings performance in December quarter," Hota said.
Rusmik Oza, Executive Vice President and Head of Fundamental Research at Kotak Securities, also believes that the March quarter will also see good growth in sales and earnings because of the low base effect.
"As per Bloomberg consensus estimates, March 2021 could see 42 percent aggregate earnings growth In Nifty50.. In the March quarter of the last year, there was a big negative surprise in earnings because of the lockdown announced in late March. Going by Bloomberg consensus estimates sequential earnings growth in Q4FY21 could be better than the Q3," Oza said.
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