The corporate earnings in the first quarter of fiscal 2021 were incomparable, given the impact of COVID-induced lockdown, which tested the resilience and agility of business models.
Despite the challenges, there were earning hits mainly in IT, pharma, cement, chemicals, and banks while earning misses were more prevalent in autos, consumer discretionary, energy, insurance, and AMCs, according to a report by HDFC Securities Institutional Research.
The major highlights of the quarter gone by included margins beat estimates across multiple sectors due to sharp cost-cutting initiatives and improved pricing power in the wake of lower competition.
The industry also saw some positive management commentaries on June/July exit run-rate of revenues as unlocking led to sharp demand rebound in multiple sectors, viz., staples, paints, select autos, cement, insurance, IT, metals and energy.
In Q1FY21, larger companies enjoyed continued market share gains as against smaller players and unorganised sector. The banks saw improvement in moratorium trends while an uptick in capital markets activity led to strong performance for brokers and exchanges, the report noted.
The brokerage house believes the Q2 and Q3 results will be better indicators of the underlying demand conditions and stress in the banking sector as supply chains settle down, moratorium period ends, and the festive season kicks in.
“Given the sharp pull-back in markets and Nifty valuations back to 18x FY22, markets would await more concrete evidence of a sharp FY22 earnings rebound, which is currently built-in,” Varun Lohchab, Head Institutional Research, HDFC Securities said.
The brokerage now builds in -5%/+41% YoY growth for aggregate PAT for FY21/FY22 respectively.
It remains cautious in near-term post sharp run-up recently. “With recent run-up back to pre-COVID levels for most sectors (except financials, infra, and metals), risk-reward has again turned unfavourable with limited upsides on our top picks,” the report added.
HDFC Securities Institutional Research maintains a mix of defensives (telecom, IT, pharma, and utilities), quality cyclical (select banks, cement, autos, infra, and consumer discretionary) with a positive bias towards technology (telecom and IT) and manufacturing-led gradual economic recovery, which it plays through cement and select financials/industrials.
Its preferred sectors are telecom, IT, chemicals, pharma, insurance, large banks, cement, and gas while we are underweight on consumption (staples, discretionary, and autos).
The brokerage’s large-cap picks in the model portfolio include RIL, Bharti, Infosys, ITC, SBI Life, ICICI Bank, Axis Bank, and L&T. Within mid-caps, its prefers Max Life, IGL, Gujarat Gas, Crompton Consumer, Alkyl Amines, Galaxy Surfactants, JK Cement, and KNR Construction.
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