Brokerages expect V-shaped recovery in corporate earnings in second qtr

Nifty50 firms' combined net profit likely to jump 24%, against 50% contraction in Q1

Led by a big positive swing in Bharti Airtel’s net profits, brokerages expect V-shaped recovery in the combined earnings of Nifty50 companies in the July-September quarter (second quarter, or Q2) of 2020-21 (FY21).
 
According to brokerage estimates, Nifty50 companies’ combined net profit is expected to jump 24 per cent year-on-year (YoY) in Q2FY21, reversing the trend of an earnings contraction of the previous two quarters. In comparison, index firms’ combined net profit has nearly halved YoY in Q2FY21 and fourth quarter of 2019-20, while it was down 9.5 per cent YoY in Q2 of 2018-19 (FY19).
 
The index firms’ combined net sales (net interest margins in case of banks and non-banking lenders) is expected to decline 8.3 per cent YoY in Q2 — a sharp improvement from the 27.3 per cent contraction in Q1FY21.
 
However, excluding Airtel, Nifty firms’ combined net profit is expected to decline 6.4 per cent YoY during the quarter, while their net sales is expected to contract 8.8 per cent YoY. Brokerages expect Airtel to report a net profit of Rs 161 crore in Q2FY21, against a net loss of Rs 22,800 crore a year ago, translating into a positive swing of Rs 23,000 crore in earnings. In contrast, Nifty50 companies’ combined net profit is expected to rise Rs 16,800 crore YoY in Q2FY21.
 
Airtel had made additional provision of Rs 28,450 crore for adjusted gross revenue dues in Q2FY19 after the Supreme Court order. Other index firms expected to post a big positive swing in earnings include ICICI Bank, Larsen & Toubro, IOC, Axis Bank, and HCL Technologies.
 
The analysis is based on an earnings estimate for Q2FY21 by Kotak Institutional Equities, Edelweiss Securities, and YES Securities. For banks and non-banking financial companies, net sales are net interest income. For others, net sales are from the sale of goods and services (net of indirect taxes).

 
“We expect Q2FY21 net profit of our coverage universe to increase 16 per cent YoY, led by banks (low slippages), information technology services (reasonable demand trends across large verticals), metals and mining firms (increase in realisations), and pharmaceuticals (recovery in US revenues),” wrote Sanjeev Prasad, Sunita Baldawa, and Anindya Bhowmik of Kotak Institutional Equities in their earnings estimate for Q2.
 
Analysts at Edelweiss Securities expect recovery, but don’t foresee growth as yet. “Earnings are still in contraction mode. While a tax base effect will weigh on profit after tax, earnings before interest, tax, depreciation, and amortisation (Ebitda) growth is more promising and skewed. Exporters (IT, metals, and pharma) and domestic consumption (fast-moving consumer goods, auto, telecom) should lead (10–20 per cent YoY Ebitda growth), while domestic investment (industrials, cement) and energy will lag,” said Edelweiss analysts Prateek Parekh, Aditya Narain, and Padmavati Udecha in their earnings estimate for Q2.
 
The recovery in headline earnings is, however, likely to be skewed, with a majority of index companies likely to report decline in earnings.
 
In all, 29 index firms are expected to either report a decline in earnings or net losses in Q2. Tata Motors is expected to be the worst performer, with a net loss of Rs 1,800 crore. Some of the other major firms likely to report earnings contraction include Reliance Industries (RIL), Tata Consultancy Services, ONGC, Bajaj Finance, and ITC, among others. In comparison, 33 of the 50 index companies are expected to report YoY growth in net sales during the quarter, led by HDFC Life Insurance, Hero MotoCorp, Maruti Suzuki, and Britannia Industries. 
 
At the other end of the spectrum, Grasim Industries, ONGC, RIL, GAIL (India), IOC, and Bharat Petroleum Corporation are expected to report double-digit decline in net sales YoY during the quarter.