How will the Q3 results look like for Dec-21 quarter

8 Jan 2022 , 09:43 AM

India gets into the results season with Avenue Supermarts announcing its results on 08th January followed by the big technology companies like TCS, Infosys and Wipro announcing their results on 12th January. The results season is likely to be challenging for a number of reasons. For the Q3 results season ending Dec-21, IIFL Capital Services will be doing a detailed coverage of 300 of the most valuable companies listed in India by market cap. We will not go by any index this time around, but stick to the highest market cap stocks as per AMFI.

Why the Q3 results will be challenging?

There are a number of reasons why the results season is likely to be challenging. Here are some key factors that will have a bearing on the results.

• The spread of Omicron has had its impact on the latter part of the Dec-21 quarter with palpable impact on contact-intensive sectors like construction, hotels and tourism. These companies are likely to see an impact on top line revenues.
• Input costs was a problem in Q2. While the input costs of most materials have sort of peaked out, they are still much higher on a yoy basis. That is going to leave an impact on sectors like automobiles, cement, FMCG etc.
• Supply chain constraints are still a challenge and if the Omicron variant gathers steam, this could only worsen. Sectors like automobiles and electronics are facing a shortage of microchips. Export oriented companies are facing shortage of containers. List can go on.
• Lastly, the much touted revenge consumption was visible in the Sep-21 quarter, but it is expected to have tapered in the Dec-21 quarter. The festive season did help, but ground reports indicate that sales push was not as exciting as anticipated.

What to expect in Q3 from the various sectors?

Despite input cost pressures, the Q2 profit growth remained robust at over 54% on a yoy basis and 24% on a sequential basis. How would sectors pan out in Q3?
a) FMCG sector is likely to see a mix of heady top line growth and constrained profit growth. The top line growth will be largely attributed to the festive season but commodity inflation will continue to haunt bottom lines. Crude was $75/bbl in the second quarter and is closer to $80/bbl in the third quarter.

b) Auto stocks have been in a rough spot and not much has changed. Most auto companies, except Tata Motors and M&M to some extent, have seen consistent pressure on monthly sales growth. Not just wholesale dispatches, even retail sales have been impacted as customers turn cautious. The microchip shortage is improving but it will be March 2022 by the time auto companies can resume normal production.

c) IT sector will once again be the sector to watch out for. They still contribute a chunk of the rupee profits of the Nifty 50 universe. In the December quarter, most of the large IT companies have seen sharp growth in corporate IT outlays. Digital allocations and discretionary allocations have been  higher. But the joker in the pack could be the mid-cap IT companies that could really surprise on the upside.

d) In the banking space, PSU banks will continue to gain from lower provisioning in the Dec-21 quarter. However, early indications on loan growth and deposits growth show that private banks may have also had a robust December quarter. Private banks are likely to see strong traction in retail banking, SME banking and whole sale banking in Q3.

e) It is likely to be another robust quarter for cement stocks. The cement pricing power has been with the manufacturers in Q2 and that is expected to continue in Q3 also with average spike in cement realizations up by 2%. In addition, while freight costs may still stay, most cement companies will benefit from tapering of power costs. At a top line level, a sharp recovery in residential housing will boost cement demand.

f) Healthcare stocks are likely to be a sort of mixed bag. Pricing pressure and squeezing of margins in the US markets is likely to have continued in the Dec-21 quarter. Pharma stocks with a strong US presence will continue to face pressure but pharma stocks with EM presence will do a lot better in the Dec-21 quarter.

What does the overall picture of Q3 look like?

The Dec-21 quarter is likely to face pressure on two fronts. Firstly, the input costs in many  sectors have stabilized but hardly abated. Secondly, bond yields have shot up by 35-40 bps during the Dec-21 quarter and that has pushed up cost of funds. That is also likely to put pressure on the bottom line.

Bloomberg is estimating a 1.2% fall in sequential revenues and a 5.6% fall in sequential profits in the Dec-21 quarter. In a way, many of the energy companies reported exceptionally high profits in the previous quarter due to higher crude prices resulting in inventory translation gains. That is unlikely to repeat in Q3.

The good news is that even with this normalization of profits and sales, the Nifty companies should be on target to touch Rs.873 EPS by end of FY23. That should make the current valuations look a lot more palatable. But that is a different story altogether!