When the Sensex touched its record high during ‘mahurat’ trading this Diwali, creating wealth of ₹94,381.68 crore for investors in just one hour (translating into a whopping ₹26.21 crore per second), what it did was to immediately give a sense of optimism prevailing in the market. Indeed, markets are on song and it looks like the current rally has much more distance to cover. One of the key reasons supporting the current rally is the better than expected earnings’ reports of corporate India. Markets can go up due to several triggers, including interest rate cut, positive government announcements, etc. but when the rally in the equity markets is supported by earnings’ upgrades and better than expected earnings, the strength in the market momentum is validated.
The investing community had its eyes glued on the earnings for the July-September quarter. It was expected that the September quarter would be a much better one on a sequential basis. There was also the expectation that corporate earnings in the September quarter would fare better with businesses emerging from a nationwide lockdown which had caused unprecedented supply chain disruptions in the economy. Also, several analysts expected that the rebound would be helped by lower input costs, cost-cutting measures adopted by various companies and a steady demand recovery.
Now that the earnings are out for the season, all the expectations of the investors and analysts have come true while the management commentary has pitched in an additional surprise for the investors. With there being a positive undercurrent in all such commentaries, there is now an upsurge of confidence in investors. The demand recovery across all sectors does seem to be on an upward spiral and that bodes well for the markets in the coming days. Several Nifty components have declared better than estimated results, including leading entities such as Asian Paints, Tata Motors, ICICI Bank, State Bank of India, Kotak Mahindra Bank, HDFC Bank, etc.
The Q2 results for several large companies re-confirms RBI’s and the government’s claims of a V-shaped recovery. The aggregate net income of 46 Nifty companies grew by 4.8 per cent from a year earlier in the quarter through September. This has got the analysts excited because it was expected that earnings would grow sequentially on QoQ basis. However, a minor dip was expected on YoY basis. Almost two-thirds of the earnings surpassed or matched analysts’ estimates this earnings season when compared to a double-digit dip in profits in the previous two quarters. To understand the earnings season it would be useful to have a peek at the sectoral earnings. This will help investors understand the underlying trend and take appropriate investment decisions.
Sectoral Performance Review
Automotive and Automotive Ancillary
The automobile and its allied industries were compelled to close manufacturing facilities due to slowdown but with the gradual easing of those headwinds, the sector is now witnessing resurgence as sales numbers look positive over the last couple of months. According to the latest data by the Society of Indian Automobile Manufacturers (SIAM), passenger vehicle sales in the July-September quarter increased to 7,26,232 units from 6,20,620 units in the same period last year. Similarly, two-wheeler sales during the September quarter rose marginally to 46,90,565 units as compared with 46,82,571 units in the same period last fiscal.
However, commercial vehicle sales saw a dip of 20.13 per cent at 1,33,524 units in the quarter under review. It is the sixth consecutive quarter of sales de-growth in the commercial vehicle segment. In the PV segment, Maruti Suzuki saw a 10.3 per cent YoY expansion during the quarter and reported net profit growth of 11 per cent. Mahindra & Mahindra’s PV segment has put up a contrasting show ending the month with a sales decline of 1.5 per cent YoY due to supply-side constraints. In the two-wheeler segment, Hero MotoCorp was the best performer, recording a sales growth of 23.66 per cent with the bottom-line expanding by 9 per cent YoY.
The tractor segment saw impressive growth on the back of a good monsoon and an increase in rural income. Escorts and VST Tillers Tractors recorded YoY revenue expansion of 24 and 36 per cent, respectively, while net profit increased YoY by 123 and 369 per cent, respectively. Factors like an increase in demand for personal mobility, the festive season offers, low interest rates and easy availability of financing has contributed to continued resilience in PVs and two-wheelers, and this growth momentum is likely to extend till the end of CY20.
The banking sector is a key indicator of the state of the economy. Banks’ non-performing assets had been increasing from the last three fiscal years and recovery was low. The Reserve Bank of India (RBI) provided moratorium because of the pandemic, which further reduced the recoveries. This led to higher provisioning and stressed net profit figures. In the recently concluded Q2FY21, banks improved their performance and reported lower NPAs. For example, ICICI Bank reported a contraction of 120 bps in its gross NPAs.
The private banks showed a mixed trend in Q2FY21. ICICI Bank, Axis Bank, RBL Bank and Bandhan Bank showed a declining trend in NPAs. In the last quarter, private banks like HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Axis Bank and RBL Bank have reported profit after tax of ₹7,711.37 crore, ₹4,882.33 crore, ₹2,946.62 crore, ₹1,682.67 crore and ₹152.43 crore, respectively. Meanwhile, public sector banks like State Bank of India, Bank of Baroda, Punjab National Bank and Union Bank of India reported profit after tax of ₹5,403.81 crore, ₹1,794.30 crore, ₹544.66 crore and ₹849 crore, respectively.
The sector was one of the major wealth destroyers in the year 2020. Private sector banks gave a negative return of 26 per cent while the public sector banks gave a negative return of 37 per cent in the last one year. Going forward, the MSME segment may see a marginal uptick in disbursement owing to the Emergency Credit Line Guarantee Scheme. As the cost of funding for the banks has reduced, the lending will be increased. Deposit growth and NIM is expected to remain strong on a sequential basis. Post the easing of restrictions, there has been a substantial increase in disbursements across retail products. Improvement in the repayment trend has also reduced the moratorium book for most of the lenders.
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