As the economy rebounded following the Covid led-lockdown, India Inc also staged an impressive show in the December 2020 quarter (Q3FY21). Festive season-led buying, cost-cutting measures and lower raw material costs came to the fore to boost corporate earnings, beating analysts' expectations.
A quick analysis of the BSE 500 companies shows that there are 25 firms that reported a turnaround performance during the period under review – swinging from loss to profit – as compared to the previous corresponding period. The list includes some of the prominent names such as Adani Green Energy, Bharti Airtel, Bank of Baroda, Lupin, Steel Authority of India, Tata Steel, The India Cements, Dr Reddy's Labs, Jindal Steel & Power and Punjab National Bank.
On their part, the markets took note of the development and handsomely rewarded a bunch of these counters at the bourses. Stocks of 18 of these 25 firms managed to outperform the S&P BSE Sensex on a year-to-date (YTD) basis, having risen up to 66 per cent as of February 22, 2021, as against a nearly 6 per cent gain in the BSE Sensex and 4 per cent rise in the BSE500 index, as per data available on ACE Equity.
“Key factors that drove the earnings beat versus our expectations include sharper-than-expected demand recovery with the opening up of the economy; continued cost optimisation measures; festive season that boosted consumption demand across the staples, durables, and discretionary sectors; strong operational delivery by the BFSI sector; and a good show by cyclical sectors," said Gautam Duggad, head of institutional research at Motilal Oswal Securities.
Going ahead, most analysts now caution against the rising commodity prices, which they feel can dent the fragile economic recovery and fortunes of India Inc. India's situation as a commodity importer improved last year when prices went down (median gross margin for companies where this matters is up to a 5-year high), reports suggest. However, the reverse could now play out.
“A clear risk emerging from the earnings season is concern about rising commodity costs. Companies appeared worried about inflation in crude, crude derivatives, metals (steel, copper, palladium, etc), palm oil and tea, among others. Separately, there is an acute shortage of ocean containers, as well as the well-known shortage of certain semiconductor components for the auto industry,” cautions a report from global brokerage firm, UBS.
According to a recent note by BofA Securities, 31 Nifty50 companies, or 46 per cent of free-float weighted Nifty market-cap, is exposed to commodity-related risks. It cautions that the full impact of the rise in commodity prices is yet to play out in the markets.
That apart, market valuation after a steep rise from March 2020 low is a concern. Given this, most experts now expect a consolidation phase to set in as the markets digest the recent developments.
“Nifty valuations at 21.3x FY22 EPS are not inexpensive anymore and demand consistent earnings delivery ahead. Rising bond yields may cap equity valuations as the Reserve Bank of India (RBI) may have to do a balancing act to keep bond yields at lower levels while managing the government borrowing program," Duggad of Motilal Oswal said.