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MUMBAI : The economic recovery and festive sales are expected to power healthy corporate earnings in the December quarter, even as a broad-based recovery remains elusive. Analysts said that sectors such as metals, oil and gas, banking, financial services and insurance (BFSI), and IT would drive the earnings momentum in the fiscal third quarter, while staples and automobiles may lag.

The quarter witnessed rising commodity prices and technology adoption, at a time the viral pandemic remained subdued and global central banks signalled monetary policy tightening ahead.

Trideep Bhattacharya, chief investment officer, equities, Edelweiss Mutual Fund, said while overall earnings will reflect robust revenues, there will be a divergence between commodity-users and commodity-related earners. “We think revenue growth will certainly reflect improving economic conditions, while on the earnings front, we expect high commodity-related inflation impact on a year-on-year basis. However, corporates are also likely to see a bit of improvement on margins on a sequential basis. Among triggers and headwinds, a strong festive season and improvement in credit growth are positives, the headwinds include a transient slowdown in rural India and high commodity prices," he said.

Amid rising concerns about steep valuations, Indian markets gained over 20% in 2021, outpacing emerging markets. As central bankers worldwide focus on inflation control and policy normalization, corporate earnings delivery has become even more crucial. However, a third covid wave sparking fresh restrictions may derail economic revival.

Gautam Duggad, head of research, institutional equities, Motilal Oswal Financial Services Ltd, expects Nifty companies to report sales, Ebitda, and net profit growth at 29%, 17%, and 26% year-on-year in Q3, respectively. “However, the breadth of earnings remains weak, with 42% of companies likely to post a year-on-year decline in earnings while 38% are expected to post over 15% earnings growth," Duggad said.

Deepak Jasani, retail research head, HDFC Securities Ltd, said profits of Sensex companies might rise 20% year-on-year and 21% for Nifty companies.

Commodity prices remain high, squeezing margins for companies in highly competitive sectors. Management guidance on revenue and margins for the fiscal fourth quarter will remain in focus, Jasani said.

Despite the economic recovery and festive sales, third quarter consumption demand may be tepid due to price hikes to offset rising commodity prices.

During the quarter, Brent crude prices declined 1.66%, compared to a sharp 25% increase in the same quarter the previous year. Copper prices increased 6% in the December quarter.

“Though we have seen cool-off in some of the commodity prices, palm oil, crude derivatives, and vegetable oil prices have remained at elevated levels. We believe FMCG (fast-moving consumer goods) companies would continue to see gross margin pressures in Q3FY22 despite price hikes. Similarly, operating margins are also expected to contract during the quarter," said Pankaj Pandey, research head at ICICI Direct. He feels overall economic recommencement and the festive spurt will drive December quarter earnings, but the major headwind continues to be commodity inflation impacting margins in some pockets.

Given the favourable base of the year-earlier third quarter, Pandey expects companies under ICICI Direct’s coverage universe to report overall revenue growth of 28% in the December quarter.

Sorbh Gupta, fund manager, equity, Quantum Mutual Fund, agreed that margin pressures would play out in the third quarter for some companies, especially in the B2B segment and non-branded consumer products.

“Consumer staples, energy-intensive industries and autos are the sectors which could face margin pressures in the quarter. However, we believe corporates operating at the premium segment of the market are likely to have better ability to pass on the inflationary pressure," Gupta said.

Analysts will watch out for management commentary on inflation, interest rates and the impact of the third covid wave.

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