Q3 Results: The New Dawn
Dalal Street Investment Journal|February 15 - 28, 2021
The equity market has once again started gaining new highs. One of the reasons for such a stupendous performance is better-than-expected earnings’ growth of corporate India. The article highlights the performances of various sectors and outlines the reasons for this impressive recovery

If stock prices are the slaves of earnings’ growth, then at this point the master is ordering and the slave is obediently carrying out the commands. After showing a minor correction in the last week of January, the equity market has once again started gaining new highs. Benchmark equity indices such as Nifty and Sensex have crossed the psychological level of 15,000 and 51,000, respectively. Other sectoral as well as broader equity indices are also showing a rise in respective indices. The following graph shows the performance of some of these indices year-till-date as on February 5, reflecting the earnings from these sectors.

One of the reasons for such a stupendous performance is better-than-expected earnings’ growth of corporate India. It will be the second such consecutive quarter when we will be witnessing earnings of India Inc. getting upgraded. To put things in perspective, it has come almost after six years of continuous downgrades. To give you a sense of the quantum of outperformance, the top five listed Indian companies in India by quarterly profit have beaten the consensus estimates by a huge margin. For example, at the start of Q3FY21 it was estimated that Reliance Industries, India’s largest company by profit, will post net profit of ₹9,940 crore while the actual profit came in at ₹14,819 crore. Other companies like TCS and Infosys have also exceeded the street estimates in terms of profit.

Tata Motors, which was not doing well earlier, has also sprung a surprise. It reported a profit of ₹3,222 crore in Q3FY21 against the expectation of ₹1,428 crore. All this clearly shows how the earnings’ growths of companies are being re-rated. These upgrades have clearly reinforced the word ‘recovery’. A couple of quarters back, market participants were speculating about the shape of the recovery such as ‘U’, ‘L’, ‘V’, etc., but now it collectively agreed that it has been a V-shaped recovery. The best part is that even the management commentaries have been encouraging.

IT companies, for example, have revised their revenue guidance upward. The management commentary even from the banking sector shows that the demand for restructuring has been much lower than expected. The best example of this is State Bank of India (SBI), India’s largest company by asset size, which saw 14 per cent rise in net profit sequentially due to better retail loan growth and better asset quality. Post its results, the shares of SBI extended gains to a record high after its quarterly profit beat analysts’ expectations. SBI stock price has shot up by as much as 15 per cent to ₹408 in early trade with many brokerages increasing their target price on the stock.

Apart from banking and finance, as of February 5, 2021, 24 Nifty companies have announced their results. On a YoY basis, there has been a marginal rise in sales of 14 per cent. One sector that clearly stands out in its performance is automotive. Companies such as Hero MotoCorp, Bajaj Auto and Maruti Suzuki India have posted revenue growth in double digits. Even on a sequential basis, we see automotive companies posting double-digit growth while a company like Tata Motors has posted 41 per cent jump in sales. The oil and gas sector continues to lag behind and companies like Reliance Industries and Indian Oil Corporation posted a subdued performance.

At the operating level, companies posted double-digit growth on both sequential as well as on yearly basis. Sectors like metal and automotive were the main contributors to such growth. JSW Steel saw its operating profit growing by 33 per cent and 136 per cent on quarterly and yearly basis, respectively. Automotive companies like Tata Motors and Bajaj Auto saw a substantial jump in their operating profit, both on sequential as well as yearly basis. The EBITDA margins on an average have improved on a yearly basis due to cost-cutting by companies. The fall in margins on a quarterly basis was primarily due to poor performance of Dr. Reddys Laboratories, which pulled the overall performance downwards.

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