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VIEW: India Inc may see 10% YoY contraction in aggregate PAT in Q2FY21

As India Inc., seems to recover from the shock of COVID-19 impact slowly, the markets are keenly watching Q2 earnings to gauge the true shape of the recovery. While, Q1 earnings provided glimpses of the recovery path, based on cues from sectors that found prominence during the lockdown phase of the economy. But as the economic recovery seems not in sight anytime soon, much was left to the imagination of analysts and industry watchers in the last three months.

Our in-house research team expects around 10 percent YoY contraction in aggregate PAT in Q2FY21 for our coverage companies (excluding Vodafone, Bharti and Tata Motors). Based on the results announced so far, the aggregate profit has grown by around 10 percent YoY in Q2FY21. However, out of the 19 coverage companies that have reported so far, 6 companies (accounting for around 60 percent of PAT) are from the IT sector. Since the lockdown has impacted the domestic demand, the aggregate PAT in Q2FY21 could moderate once the reporting season gathers pace.

Sectorally, while PAT is expected to improve across sectors, consumer discretionary and auto companies are expected to see sharp improvement sequentially. The aggregate PAT of auto companies is expected to turnaround from a loss of around Rs 10 billion to Rs 58 billion while consumer discretionary companies are expected to report an aggregate PAT of Rs 23 billion (vs. loss of Rs 31 billion last quarter), largely due to improvement in PAT of retail and paints companies and lower losses of Indigo airlines.

The aggregate sales in Q2F21, for our coverage companies, is expected to decline by 10 percent YoY (vs. around 36 percent contraction last quarter). However, the decline is largely due to lower commodity prices. Excluding the commodity companies (Metals and Mining and Oil & Gas companies), the aggregate sales of our coverage companies is expected to see a modest contraction of 1 percent YoY in Q2FY21 (vs. around 17 percent contraction last quarter).

While sales are estimated to improve across sectors, the auto sector is expected to see the sharpest turnaround sequentially. The aggregate sales of auto companies is expected to more than double from Rs 357 billion in Q1FY21 to Rs 854 billion in Q2FY21.

The consensus EPS estimates for Nifty have also been broadly stable at 468 (vs. 466 on October 1, 2020) so far during the 2QFY21 reporting season, suggesting that the results so far have been broadly in line with street estimates.

Taking all these scenarios into consideration, we would believe recovery is happening in many important sectors and will catch up soon in others as COVID cases show a trend of decline and push a full-fledged opening of the economy. One thing is for certain is that the long-term India story remains intact and would continue to attract foreign capital as growth picks up.

Retail investors may continue to invest through systematic investment plans of mutual funds. Direct investments in stocks should be done with proper research and advice.

—R Venkataraman is MD, IIFL Securities. The views expressed are personal

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