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Will we see further earnings downgrade post Q1FY21 results?

As the lockdown continues in several parts of the country, growth is barely picking up 

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Published 3 months ago on Jul 17, 2020 Read

Hemang Jani, head-equity strategy, Motilal Oswal Financial Services

Q1FY21 will be dismal with many sectors expected to post losses, barring pharma, IT and consumer, which are expected to post flat-to-positive numbers. Auto will be the worst hit with the sector (excluding Tata Motors) expected to clock a loss of Rs.19.7 billion. Tractors are an exception here, as both M&M and Escorts have shown strong growth in rural regions. Private banks, healthcare and PSUs are the only sectors to post marginal growth. Technology will be flat, while cement, utilities, oil & gas, consumer, insurance and NBFCs could see double-digit decline. Though TCS’ QoQ revenue growth fell, its commentary was extremely positive for the next three quarters. Healthcare will see 5% decline in sales with Aurobindo and Dr Reddy’s likely to report strong growth, whereas Cipla, Sun Pharma and Lupin should post a decline. Private banks will report marginal growth as we believe the proportion of loans under moratorium will decline gradually. HDFC Bank and ICICI Bank are likely to report 40% and 20% net profit growth, respectively, while Axis and Kotak could see a decline in net profit by 20% and 3%, respectively. NBFCs as a whole will see net profit falling by 13% as the focus will be on collections. In effect, we expect a 41% decline in Q1FY21 Nifty earnings. In April, there were a lot of downgrades, but June turned out to be much better than what was expected. Hence, we have seen 3% upgrade in Nifty earnings for the current fiscal from Rs.454 to Rs.457. Though there are a lot of variables such as no clarity on demand revival or how the second wave of COVID-19 will pan out or when the lockdown will be completely lifted, we are increasing our estimates for FY22 from Rs.637 to Rs.647.

Deepak Jasani, head-retail research, HDFC Securities 

Q1FY21 will be a complete washout with banks, telecom and agrochem performing optically better on a year-on-year basis. Analysts usually cut estimates gradually. Over the past few years, we have seen that Nifty EPS growth estimates are quite positive at the beginning of the year and revised downwards gradually. Given the conditions, it is safe to assume that post Q1, there is certainly going to be more downward revision as the outlook for the second quarter does not seem to be very promising. Many factories are still reporting low utilisation levels and a large portion of the country is still under lockdown. While Q2 could be a quarter of YoY de-growth, the outlook for the December quarter depends on when the lockdown is lifted and when the pandemic is brought under control. By September, if things get better, the December quarter numbers will look better YoY owing to pent-up demand and restocking. Currently, companies are operating on a ‘just-in-time’ concept because the demand conditions are not clear amid continuing supply constraints. The government and the RBI have been taking a lot of steps to normalise the situation but it does not look sufficient. There may be a need for one-time restructuring of a lot of loans in the system. Given this background, FY21 and FY22 Nifty EPS estimates of Rs.454 and Rs.630, respectively, could get revised downwards.