Earnings growth is likely to sustain pace in Jun quarter

Though some sectors suffered due to localized lockdowns in the wake of the second covid wave, momentum is expected to continue in the April-June period led by cyclicals, while consumer-facing sectors may moderate somewhat, the analysts said.

Tata Consultancy Services will announce its quarterly results on 8 July, kick-starting the earnings season.

Rising commodity prices may crimp margins in some sectors, while higher employee costs due to the salary hike cycle may hit IT companies.

Gautam Duggad, head of research, institutional equities at Motilal Oswal Financial Services Ltd, said Nifty companies may post profit growth of 106% year-on-year in the June quarter due to a low base owing to the stringent nationwide lockdown a year ago.

Even on a two-year compounded annual growth rate (CAGR) basis, he expects Nifty companies to post an earnings growth of 20%, led by metals. Excluding metals, the two-year profit CAGR is expected to be 12% for Nifty companies, Duggad said.

“After posting the best-in-a-decade earnings growth of 15% in FY21, we are expecting Nifty FY21-FY23 earnings per share (EPS) CAGR of 26%. Our Sensex FY22/FY23 EPS estimate stands at ₹2,346 and ₹2,741, respectively, while Nifty FY22 and FY23 EPS is estimated at ₹743 and ₹870, respectively,” Duggad said.

According to Pankaj Pandey, head of research at ICICI Direct, while there would be some sequential weakness, more so with retail and consumer-facing businesses, growth will be in strong double digits across segments on a depressed base.

“Sectors such as pharma, FMCG (fast-moving consumer goods), metals, IT and consumer discretionary are likely to report robust growth. Consumer-facing segments such as retail, multiplexes and auto, which faced the brunt of lockdowns during the second wave, will have relatively weaker earnings in Q1,” Pandey said.

Deepak Jasani, head of retail research at HDFC Securities, expects IT services to do well. “Strong deal momentum, broad-based industry-vertical trends towards digital transformation, accelerated hiring and improving alignment with hyperscalers/SaaS (software as a service) indicate continuity of momentum for the sector. Tier-1 IT is expected to deliver 4% quarter-on-quarter and 20% year-on-year revenue growth,” Jasani said.

“Margin will be impacted by wage increases, increase in sub-contracting/attrition, offset partly by operating leverage and forex/offshoring,” Jasani added.

The shift from informal to formal sectors, impact of raw material price increase and inventory gains/losses due to China’s intervention in commodity markets, management commentary on recovery post the second covid wave and the implication across segments are key themes analysts will be watching out for in first quarter of FY22.

The prices of basic raw materials such as oil and metals increased significantly in the first quarter. Brent crude rose 18%, while aluminium, copper, zinc and lead were up 5-16%.