Nifty companies’ revenues may improve after 3 quarters

Mumbai: The Nifty 50 companies may post a revenue turnaround in the December quarter after a gap of three quarters, bolstering the broader revival narrative. The momentum is expected to continue in the fourth quarter following the gradual recovery in economic activity.

According to ETIG estimates, the Nifty 50 companies are expected to report an 8.7% year-on-year aggregate increase in net sales for the third quarter in the upcoming earnings season after recording a fall of 4-27% in the previous three quarters. Net profit may rise 4.4% on a high base of 58% growth in the year-ago quarter.

“The favourable base effect which benefited the second quarter earnings is missing in the third quarter. Barring metals, we are estimating Motilal Oswal universe earnings to grow 6% and Nifty earnings to stay flattish year-on-year,” said Gautam Duggad, head of research, Motilal Oswal Financial Services.

HDFC Securities retail research head Deepak Jasani has a positive outlook on sales and profits. “While activity levels in the third quarter may still be short of last year due to Covid-related issues, higher prices of goods and services could mean better topline growth,” he said.

The aggregate operating margin is expected to be 19.3%, similar to the year-ago level but lower than the 22% of the previous two quarters, suggesting that the benefits of cost efficiencies may be waning amid rising input prices and increased operating and marketing activity.

On the sector front, automobiles, FMCG, IT, metals and pharmaceuticals are likely to do well. “Growth will be driven by cyclicals like cement and metals (low base as well rising prices) and another strong quarter by pharma,” said Duggad. He expects bank performance to be little changed given the possibility of high provisions.

The future trend depends on consumption growth persisting and vaccinations restoring normalcy to the industrial activity. In addition, proposals aimed at economic revival in the forthcoming budget will play a crucial role. “If demand continues to show the same pace of growth in the fourth quarter, one will be more confident of a lasting economic revival,” Jasani said. “High-performance indicators show a mixed picture once in a while, but on an overall basis, the signal is positive.”

Duggad expects stronger momentum in the next fiscal year. “We have seen a quarter of earnings upgrades in September after five years of downgrades. We expect this momentum to continue and earnings to post a sharp recovery in FY22,” he said.

Sector trend

Automobiles

Auto company volumes grew 10-25% year-on-year during the quarter, helped by festive and pent-up demand as the sector emerged from a protracted slowdown. Improving operating leverage and tight cost controls are likely to expand operating margins, resulting in operating profit growth being better than revenue growth.

Banking

Credit growth improved in the agriculture, housing, and retail segments while industrial demand remained low. Overall collection efficacy was above 93% during the quarter. With an end to the moratorium, banks are expected to be cautious while lending. The bad assets ratio is likely to inch up after staying low in the previous two quarters.

Capital goods

The order pipeline improved to over ₹4 lakh crore during the quarter as the government issued several big-ticket orders. Execution is also expected to improve with easing labour shortages and working capital issues for the capital goods companies.

Cement

According to analyst estimates, the all-India average cement price fell 3% to `334 per 50 kg bag from the previous month following slow execution of infrastructure projects amid delays in payments by the government. But large companies are likely to focus on volumes and improve revenue growth. Revenue of UltraTech Cement, ACC, Ambuja Cements, Shree Cement and Dalmia Bharat are likely to grow at 6-11% year on year. Net profit may grow 12-18% due to cost discipline and benign raw material prices.
FMCG

A recovery was seen in modern trade and discretionary consumption during the quarter amid strong rural demand. The timely onset of winter ensured a pick-up in personal care demand. However, rising raw material prices may affect profitability. HUL, Nestle and Asian Paints are likely to perform well.

IT

Top-rung IT companies are expected to report 3% aggregate sequential growth in dollar-denominated revenue, helped by sustained deal flow. Unfavourable currency movement may hurt growth in rupee terms. Management commentary on client budgets will be crucial.
Metals

Expect a very strong quarter for the metal companies. Domestic steel makers raised prices on multiple occasions during the quarter, which may improve realisations by 15%. Tata Steel, SAIL, JSW Steel and Jindal Steel and Power are expected to report 10-year peak performance. Aluminium prices also rose 15% in the quarter, a positive for Hindalco and Vedanta.

Pharmaceuticals

Domestic sales recovered in the December quarter on an increase in the number of non-Covid patients consulting doctors and hospitals. Exports of bulk drugs and formulations also continued to be strong as countries scouted for alternatives to China. Sun Pharma, DRL and Divi's Labs are expected to perform well.