There’s a new wave of rising Covid-19 cases, but this may not impact activity very severely. Positive trends are expected to continue in essential services, digital services, manufacturing, mining, agriculture and construction. Rising Covid cases may factor into sentiment. However, given night curfews in metros, lower air-travel numbers, and downwards pressure on the hospitality sector.
Bank results are especially eagerly awaited in this quarter. The Supreme Court has lifted its stay order, which means that banks can report NPAs realistically. They made pro-forma NPA calculations in Q3. But the market is braced for big slippages, especially from PSU banks. Against that, there may be rising credit demand as activity expands.
The first set of results will include information technology (IT) sector majors, with TCS, Infosys and Wipro to report this week. IT results are expected to show steady expansion, with a number of new deal wins. Given acceleration in cloud adoption and a pickup in tech spending across verticals, the sector should do well. However, there may be margin pressure due to wage hikes. Currency trends could also boost rupee earnings. This holds for the pharma sector and other exporters, too. The FY22 guidance from IT majors will be important for sentiment.
In the financial sector, HDFC Bank is a sector leader and one of India’s most valuable businesses. It’s also due to declare this week. If there are negative surprises in terms of slippages, it would impact sentiment adversely for banking. However, there seems to be optimism among analysts.
Across banks, earnings could be good for the big three – ICICI Bank, State Bank of India (SBI) and HDFC, but midcap banks would be under pressure. Clarity in terms of non-performance asset (NPA) recognition has to be backed up by provisioning. Fast recognition and disposal of stressed assets and realistic assessment of recovery timelines will be key to valuations. Net Interest margins are expected to improve for most banks and so is credit growth.
Focus on cyclicals
The cyclical earnings segments are expected to drive earnings, with some optimists seeing over 20 per cent earnings CAGR among large-and mid-caps. Revenue growth projections are more muted at 8-10 per cent for Q4. There’s room for positive surprises here.
When it comes to consumption, the fast moving consumer goods (FMCG) sector is expected to continue to do well. Paints could see rising input costs (due to higher oil and gas prices) but volume expansion is expected. In the auto sector, two wheelers may disappoint, while tractors have done well.
Among commodities, steel is expected to continue its big turnaround. Cement is expected to see volume expansion and maybe, price hikes as demand rises due to policy focus on infrastructure, translating into higher construction activity. However, margins could stagnate or fall for infra developers and construction firms even though revenue should rise.
In terms of valuations, the Nifty is running at a current price-to-earnings (PE) of 33.5x. Even given the combination of a low base, and a continuing economic recovery, that seems high. Technically, the large-caps have marked time since hitting a record high in mid-February, with a correction in March followed by some recovery. The Nifty is about 3-4 per cent down from its high. Small-and mid-caps have seen recent record highs, which could indicate where investors are focussed.
Devangshu Datta is an independent market analyst. Views are his own.
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