These sectors will report good Q2 numbers | Economic Times

Despite the second wave-induced disturbances, India Inc was able to report a solid set of numbers for the first quarter of 2021-22. Now that the covid situation has improved significantly and economic activity has picked up in the second quarter, market participants are looking forward to this results season with a lot of hope. “Economic growth is back on track and the same should get reflected in quarterly numbers now,” says G. Pradeep Kumar, CEO, Union Mutual Fund.“In addition to improving economic situation, the second-quarter numbers will also look fabulous due to a low base effect —very low numbers during the same period last year due to covid disturbances,” says Hemant Kanawala, Head of Equity, Kotak Life Insurance. Due to some restrictions in the previous quarter triggered by the second wave of covid, the low base effect will be apparent even in the q-o-q analysis.Now the most important question: how much of this positive news is already factored into the price? Analysts have already started factoring in the better quarterly numbers and that explains why the expected Sensex EPS for 2021-22 is going up on a regular basis for the last few quarters. Marketwide valuations were already up because the market had been discounting this expected earnings jump. Once that started happening, Sensex PE started coming down even as the Sensex went up. Since the earnings jump will continue in the second quarter, the trailing PE multiples may come down further.Expected 2021-22 EPS has gone up due to better quarterly numbersPositive surprises and more upgrades required to push the market higher. 87038833Despite market rally, PE is coming down due to better earningsThe PE is still way above the historical average of 19 times. 87038838However, investors should note that despite the fall in PE, the valuations are still at elevated levels. For instance, Sensex’s current trailing PE of 31 is way above its historical average of 19 times. “Market valuation is expensive compared to the intrinsic fair value. While the growth is good, that may not be enough to sustain current high valuations,” says Kumar. Thus the high expectations are like a Damocles’ sword hanging on the market and the market may punish any company even for a small earnings miss. For example, most market participants believed that the IT sector will continue to report good numbers and TCS tanked by more than 6% on its results day due to a small negative surprise.Now, let us take a closer look at what is expected from different sectors.AutoThough the aggregate auto sector numbers looks disastrous, it is mostly because of Tata Motors. In the second quarter, Tata Motors is expected to reduce its net loss to Rs 1,600 crore from Rs 4,450 crore in the previous quarter and this should help the aggregate sector to report net profit versus net loss sequentially. However, the auto sector performed poorly even after excluding Tata Motors. While the sector was able to report low revenue growth, it is still under severe margin pressure.“The auto sector is now facing two problems. While the chips shortage is restricting volumes, jump in commodity prices is putting pressure on margins,” says Kanawala. At the aggregate sector level, excluding Tata Motors, net profit fell by 20% q-o-q.Banks & NBFCsWith the improvement in collection efficiency, banks continue to do well and are expected to report decent numbers, both y-o-y and q-o-q. Their revenues will show modest growth because of the improvement in new disbursements. Reduction in cost of funds and fall in NPAs are other factors that will help the sector to report 20% plus net profit growth. Leading banks like SBI, which is expected to report 50% y-o-y jump in net profit, are expected to continue with their strong performances. Due to strong performance by companies like HDFC and Bajaj Finance, the NBFC space is also expected to report good numbers.Another set of fabulous numbersDue to improvement in economic situation, several sectors will report good q-o-q numbers also. 87038894Capital GoodsWhile this segment will report decent y-o-y numbers, the pressure is building up due to spiralling commodity prices and the same will drag down margins. However, from this segment, market participants will be keener on new deal wins in the second quarter than the absolute net profit growth. Government’s Atmanirbhar Bharat push continues and the ministry of defence has recently announced a new negative list for import and this will benefit the companies with domestic manufacturing base in this space.CementMost commodity sector companies should report good numbers in the second quarter, but there are exceptions. “Among commodity companies, cement may report weak numbers. While demand will be low due to monsoon, coal prices will hit their margins,” says Kanawala.FMCGEver since the second covid wave ended in the first quarter, discretionary consumer demand has jumped in the second quarter. While the aggregate numbers look good, there will be margin pressure on some segments – especially on paints. While industrial segment is expected to deliver steady growth, automotive paint segment will be negatively impacted by the woes of the automobile sector. The decorative paints segment is expected to report faster revenue growth due to pent up demand — revenue fell in the first quarter due to covid disturbances. However, net profit growth will be muted. “Though decorative paints companies have taken price hikes to protect profitability they will not be sufficient enough to cover the rising raw material cost inflation,” says Naveen Kulkarni, CIO, Axis Securities. For instance, Asian Paints is expected to report a y-o-y revenue and net profit growth of 30% and 5% respectively. Consumer staples space have almost inelastic demand and therefore, are expected to report stable numbers in the second quarter as well.HotelsThough the fall in covid cases has resulted in a jump in demand, the sector is yet to come out of the losses. However, hotel companies have taken several steps to reduce their fixed and variable costs and therefore, were able to bring down their losses. The weakness in the sector is also resulting in consolidation and helping companies with strong parentage, like Indian Hotels, EIH, etc to gain further market share.InfraInfrastructure companies were not much impacted during the same period last year and therefore, are not going to benefit from the base effect. However, this space is a wide basket and their results are expected to be mixed. “Infrastructure space will be very interesting during this results season and some of them can give positive surprises,” says Kulkarni. Among them, road construction companies will remain on the forefront due to lower base and pick up in execution due to increased availability of labour.MetalsMetal companies reported fabulous numbers during the first quarter and a similar trend is expected in the second quarter as well. “Since metal prices are still at elevated levels compared to the same period last year, metal companies should report good numbers in the second quarter,” says Kanawala. Due to the low base, some of them may even report fabulous numbers. For example, Steel Authority’s net profit is expected to grow 2,500% y-o-y, Tata Steel (600%), Hindalco, JSW Steel and Jindal Stainless (300% each), etc. Metal companies are also expected to show good q-o-q growth because of volume improvement compared to the previous quarter. Since steel companies maintain 2-3 months of coking coal inventory, the impact of jump in its price will be negligible in the second quarter. Though it may impact in coming quarters, fall in iron ore prices should neutralise a part of the coking coal price jump.MiningWhile all metal companies are expected to report a good set of numbers, the mining sector is a mixed bag. The sudden jump in coal prices and fall in iron ore prices are the main reasons for this. Since Coal India won’t be in a position to increase production to benefit from the present coal shortage, the improvement in numbers will be restricted realisation improvement. Though NMDC will report decent y-o-y growth, its net profit is expected to fall by 30% q-o-q.PharmaAfter reporting solid numbers during the last several quarters, growth rate at pharma sector is expected to moderate. “Increased competitive pressure on the US base business, coupled with the reduced pace of launches and lower covid related off-take, is expected to drag down the overall sector performance in second quarter,” says Kulkarni. However, the aggregate q-o-q numbers will look good due to bumper profit expected from Sun Pharma.Real estateThe outlook for real estate sector improved significantly after the fall in covid numbers from the second wave. Several factors like improvement in sentiments, very low home loan rates, etc are increasing demand. Builders are also utilising this positivity to come up with new launches during the festive season. The y-o-y numbers of real estate companies will look fabulous due to last year’s very low base. With more and more companies looking to restart their offices, activities have picked up in the commercial real estate segment as well.