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Nifty topline may dip up to 25% YoY; banks, telecom, agrochem silver lining

Deepak Jasani, Head of Retail Research at HDFC Securities
While there is near unanimity in expectations about the first quarter of the fiscal year 2020-21 (Q1FY21) results being a washout for most sectors, there could be some sectors / companies that may still not disappoint as others. The little available macro data points to this.

We expect a strong Covid-19 prompted overhang on Q1FY21 earnings. On a year-on-year (YoY) basis, Nifty topline can fall 20-25 per cent, operating profit could be down nearly 10 per cent and net profit, or profit after tax (PAT), down by about 25 – 28 per cent. Sectors optically doing well and recording YoY growth could include banks, telecom, and agrochemicals. On the other hand, information technology (IT) services and utilities could see a little YoY fall.

Metals (fall in realisations, volumes), Auto (steep fall in volumes), Cement, Consumer durables, Infra (sharp drop in activity levels and unavailability of labour), Aviation, Hospitals, Logistics, Media, Oil & Gas (weak volumes and lower realization) could perform the worst.  Large-cap stocks as a group could fare better than the midcaps.  

In IT services, one can expect a sequential revenue decline of 5-10 per cent due to demand compression from direct hit verticals and supply-side factors. Earnings before interest and tax (EBIT) margin fall could be mild for some players while it will be severe where revenue decline is higher. A weakening UK and Rest of the World (RoW) currencies against the US dollar is likely to negatively impact US dollar growth by 50–70 basis points (bps).

In Fast-moving consumer goods (FMCG), the lockdown hurt liquor, cigarette, skincare, hair care, and ice creams, but benefitted biscuits, noodles, branded essentials in food, health, and nutrition, household insecticides and hygiene. With supply chains restored and a likely rural recovery, the sector could record positive growth beginning Q2FY21.

Financials have suffered from weak credit demand. While collections were impacted, the standstill classification benefit/moratorium would have optically limited slippages and gross non-performing assets (GNPAs). The true picture will emerge only in H2FY21. However, elevated provisions are likely to continue (hitting earnings) for some lenders as they may choose to strengthen their balance sheets.

While the initial part of the quarter was forgettable for most companies, we have seen a recovery in some respects from May onwards. This is reflected in the growth in power generation month-on-month (MoM) in May and June, even exports have started to pick up in June. Rural demand for agri inputs, staples, two-wheelers, tractors, etc remains strong given the timely onset of monsoon and spend by the government to alleviate distress. However, government expenditure remains subdued given the pressure on their revenues and this may delay the recovery in a lot of government-dependent sectors including Construction and Infra.

Margins across the board could get impacted due to lower operating leverage and higher cost of operations. Management commentary/guidance post Q1FY21 numbers will better reveal the near-term demand trajectory and impediments.

Most analysts had forecast a lifting of the lockdown restrictions in Q1FY21. However, even as we have entered Q2FY21, we see no topping out of new Covid-19 infections. This has prevented the complete withdrawal of lockdown and hence return to normalcy by most corporates. The delay in the complete lifting of lockdown may also impact Q2FY21 numbers. The continuing labour supply mismatches in major production centres and deferral of discretionary consumption are another factors that can impact the Q2FY21 numbers.

In the second half of the calendar year, economic revival may happen in a normal way from October onwards. Till that time, we may keep seeing Covid-19 cases resurfacing in different forms in different parts of the country preventing the complete lifting of lockdown. If the pent up demand or restocking happens and the impact of higher agri output is visible in the December quarter, we may be hopeful of growth during the period.

(The author is the Head of Retail Research at HDFC Securities. Views expressed are his own.)

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