All 13 sectors should see growth in Q3; domestic firms to clock 7-qtr high; margins expected to flatten q-o-q
Q3FY21 pre-exceptional profit growth for Jefferies coverage universe is expected to rise 1ppt q-o-q to a 7-quarter high pace of 21% y-o-y.
Corporate earnings should grow at 21% y-o-y with the earnings growing across all 13 sectors in Q3 vs. 6 in the previous quarter. Domestic company earnings growth of 12% will be at a 7-quarter high. Margins should flatten to decline q-o-q as cost normalisations are seen across several sectors and raw material prices have risen. Metals, cement, pharma and mid-cap earnings should rise 30%+ while consumer and IT will be in mid-single digits.
Earnings recovery broadens Q3FY21 pre-exceptional profit growth for Jefferies coverage universe is expected to rise 1ppt q-o-q to a 7-quarter high pace of 21% y-o-y. The earnings quality will show significant improvement as the ex commodities, metals & financials earnings is forecast to rise at an 8-quarter high pace of 14% (vs. 1% in Q2). On a sequential basis, several sectors will likely return to profit growth. These include: autos, consumer, cap-goods/infra, property, telecom and metals.
Domestic earnings to grow after 3 qtrs Our group of domestic companies’ (universe excluding exporters, O&G, metals) 12% earnings growth would be driven by autos, cement, mid-caps and property which should grow earnings at c.20%+. The earnings decline in cap-goods and property sector in Q2 is set to reverse as the problem of lack of construction labour has been largely resolved.
Revenues recovering, margins flattening The earnings growth improvement for the ex O&G, metals & finance universe is largely driven by revenue growth improving by 6pp q-o-q to 9% y-o-y in Q3. Domestic sector revenue growth improvement is sharper at 10ppt q-o-q; and will be driven by double digit revenue growth in autos, consumer and cement. Domestic company margins though will be flat q-o-q/y-o-y at 21% as benefit from higher revenue growth would likely be neutralised by cost normalisation.
Sectors/stocks with strong earnings Steel companies Tata Steel and JSW are expected to post ~25% q-o-q/~110% y-o-y Ebitda growth on improvement in steel prices; Consumer cos volume growth +3ppt q-o-q to 10%: Dabur’s Ebitda to grow ~20% y-o-y on strong health portfolio. HUL’s 18% PAT growth helped by GSK merger; Property cos should report double digit y-o-y pre-sales growth; 30%+ earnings growth reported from most pharma majors such as Sun, Cipla and Lupin helped by domestic cost cuts supporting margins (+3.3ppt y-o-y) and new launches in the US.
Earnings laggards While ITC will see a sequential improvement, Ebitda would be down 7% y-o-y as cigarette volumes (-5%) are still pressured on y-o-y basis; earnings growth for 2Whlr cos would be in flattish to down, where volume recovery has trailed that for PVs (Maruti earnings +18% y-o-y); PSU banks, will likely see higher provisioning (2.7%, +70bps q-o-q) while it falls for private banks q-o-q on upfronted NPL recognition by latter.