Sunny days ahead, Q2 earnings surprise expected to extend to Q3

For an economy battered by COVID-19, the September quarter earnings were a pleasant surprise, with many companies reporting better-than-expected numbers.

November 26, 2020 / 01:06 PM IST
 
 
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The September quarter earnings beat market expectations on many fronts and analysts and brokerages expect the momentum to continue in the second half of FY21 also.

For an economy battered by the coronavirus, the September quarter earnings were a pleasant surprise, with many companies reporting better-than-expected numbers.

Barring a few stressed sectors like aviation and multiplexes, the numbers, especially of IT and banking space, surprised participants.

Analysts say that many businesses have grown on a year-on-year basis, others are only 10-20 percent below pre-COVID levels.

Jyoti Roy-DVP-Equity Strategist, Angel Broking, said in the IT space, HCL Tech, Infosys and Persistent Systems reported better-than-expected numbers with significant beat both on both top-line and bottom-line.

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Most of the banking and NBFC companies, too, reported good numbers, especially on the asset quality front.

"We believe that most of the companies will continue to deliver industry-leading growth and therefore we remain positive on them from a long-term perspective," Roy said.

"Given that most of the companies have strong business franchises, we feel that they can continue surprising markets with better than expected numbers going forward."

An important thing to notice in September quarter earnings, as per brokerages, is a clear shift in focus to growth from cost rationalisation, with an improved demand outlook QoQ.

Brokerage firm JM Financial expects earnings to further increase in high single-digits.

"Q2FY21 results highlight the swift and sharp turnaround in earnings trajectory, led by higher-than-expected revenue traction as well as benefits from cost containment efforts over the past two quarters. We expect normalisation of earnings growth trajectory going forward, barring any severe lockdown imposed on account of the resurgence of COVID-19," JM Financial said.

The September numbers can be attributed to the lower operating cost and restrained expenditure.

In the wake of the pandemic, many companies chose cost-cutting which helped them through the critical time.

"A better-than-expected improvement in corporate earnings in Q2FY21 can be attributed to lower-than-expected operating cost for companies. Raw material (RM) costs and other expenditures (led by continued savings from discretionary expenditures) surprised positively," said Binod Modi, Head Strategy at Reliance Securities.

A favourable product mix resulted in better-blended realisation for a large number of manufacturing companies. "Companies got the advantage of lower tax rates during the quarter too, which should continue to remain visible in H2FY21 as well," Modi said.

He expects strong earnings momentum to remain visible in H2FY21 led by base effect, lower taxes, recovery in capacity utilisations for most industries, improved collection efficiencies for banks and financials and realisation recovery in select sectors.

"Recent surge in input costs may have some impacts on margins but a portion of that should get set off with the improvement in capacity utilisations," he said.

Brokerage firm Motilal Oswal Financial Services expects FY21 Nifty EPS to grow 7 percent YoY. The brokerage believes corporate commentaries across sectors suggest continued demand recovery in Q3FY21, underpinned by a healthy start to the festival season.

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.
Nishant Kumar
first published: Nov 26, 2020 01:06 pm

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