Q3 Results Preview: Citi Sees Little Room For Surprises In December-Quarter Earnings
The market has factored in the sharp sequential recovery in the earnings of companies for the quarter ended December 2020, and the room for surprises is low, according to Citi Research. Commentary for the year ahead will be key.
The earnings of Indian companies in the preceding quarter weren’t as bad as feared as they managed to cut costs as economic activities resumed following pandemic-induced lockdowns. India’s benchmark indices mirrored the trend as they rebounded from their lows in March last year, hitting fresh records along the way. That rally was also aided by central bank liquidity and a steady stream of foreign inflows.
Here’s how Citi Research expects India Inc. to fare in the quarter ended December:
Re-Emergence Of Lockdowns A Worry
For some export-oriented sectors, the re-emergence of lockdowns in Europe and other parts of the world is a worry, Citi Research said. It may impact valuations and earnings for companies, but if flows are buoyant, they may not get adversely impacted.
No Exceptional Upside For IT
According to Surendra Goyal, Citi’s head of India research, while information technology firms have performed well in the second and third quarters in the ongoing fiscal, the fourth is expected to be like any other year. Questions are now out on whether the earnings boost that one saw in 2020 for IT companies was one-off, he said.
Infosys Technologies Ltd. was his sectoral pick owing to its recent correction and large number of deal wins. HCL Technologies Ltd., Goyal said, can do well as the company is available at 18 times its estimated earnings for FY22 and its software business has started to deliver.
Prefer Larger Banks
Citi would stick to larger banks in the upcoming financial year and “not wade down the size metric”, according to Manish Shukla, analyst-banks, NBFCs and insurance. Select large cap banks, he said, are likely to deliver mid-teens growth, as it “provides enough comfort for investors”.
HDFC Bank Ltd., according to Shukla, is an exceptional performer, as other private banks may be unable to replicate what it has done. While state-run banks aren’t the best bets, the valuation argument certainly works in their favour, he said.
Pricing Key For Commodity Firms
Steel and cement makers are expected to post “strong” earnings growth in the third quarter, said Raashi Chopra, analyst-metals and cement. There’s enough earnings headroom for India steelmakers because of the price hikes that they have implemented, she said, adding the three hikes in December and two in January should ensure that earnings will stay “robust” for at least another quarter.
Within the sector, Chopra picked Tata Steel Ltd. as it’s backward integrated and won’t feel much pressure over rising iron ore costs. Asset sales on the global level will be key triggers in driving the upside, she said. Among cement makers, Chopra picked ACC Ltd. and Dalmia Bharat Ltd. as she preferred companies with reasonable valuations.
Bullish On Automakers
Arvind Sharma, analyst-autos and transportation, expects automakers to benefit from expansion of economic activity, leading to a continuous improvement in their earnings in 2021 even as their input costs rise.
Sharma said while two-wheeler firms performed well till November 2020, in line with carmakers, they had a “weak” December, which pulled down growth.