A season of upgrade for Corporate India

KS Badri Narayanan Chennai | Updated on November 20, 2020

As most stocks are already priced in, it is time to be cautious

Corporate India seems to have turned around and weathered the Covid-19-induced slowdown storm quite efficiently. The tone and the tenor of most analysts from both Indian or foreign brokerage/investment advisors have turned confident leading to more upgrades.

ICICI Securities in a report said Q2-FY21 validated this phenomenon as beats outpaced misses due to low expectations, cost-saving initiatives, rural demand, benign input prices and pockets of pent-up demand due to festive season.

A Jefferies note, said, “Of the 103 September-20 quarter result notes we analysed from our coverage universe, 75 per cent or 77 results came above analyst estimates and we raised estimates for 78 per cent or 80 of them. Forty one companies i.e. more than half of the 80 upgrades had 10 per cent+ upgrades to their FY21 EPS. The overall upgrade to downgrade ratio was 5:1,” it said.

A high proportion of stocks in the financials, cement, metals, oil & gas and several industrials saw double-digit earning upgrades. Nifty consensus earnings for FY21/22 are up 3.2 per cent/2.5 per cent since their bottom a few weeks back, Jefferies further added.

'Blockbuster quarter'

For Motilal Oswal, the September-quarter (Q2-FY21) corporate earnings season was a blockbuster one, with big beats and upgrades across its coverage universe. “With an upgrade (over 5 per cent) to downgrade ratio (less than 5 per cent) of 4:1, this has by far been the best earnings season in many years. Sixty-three per cent of the companies in our MOFSL Coverage Universe beat Q2-FY21 estimates, while 18 per cent reported below-estimate. results,” it said and added: this has resulted in the first material earnings upgrade for Nifty EPS estimates in many years.

More importantly, corporate commentaries across sectors suggest continued demand recovery in Q3-FY21, underpinned by a healthy start to the festival season.

HDFC Securities said Q2 performance was quite commendable as 70 per cent of its coverage universe of nearly 150 stocks beat Q2 earnings and 65 per cent of them saw earning upgrades for FY21/FY22. A study by various brokerages indicates that cement, private banks, PSU banks, healthcare, Oil & Gas (O&G), technology and utilities reported y-o-y profit growth, while auto, capital goods, consumer, NBFC and retail reported declines.

Reasons for caution

While analysts might have presented positive picture, retail investors need to remain cautious as share price of most of these stocks witnessed a sharp run and already priced in the positives.

Investors should also bear in mind that Covid-19 virus is rearing its head again in various countries and could cause prolonged disruption.

Though balance sheets improved due to low utilisation levels, there is a high possibility of corporate investments cycle remaining weak. Also, until the job market and income security stabilises, household spending is likely to remain weak.

Published on November 20, 2020

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