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Q3 earnings show, vaccine dry run keeps markets in good spirits

Thanks to the growth momentum and rising stock markets, this year also saw two life insurance companies, SBI Life and HDFC Life, go for an IPO. Photo: Hemant Mishra/MintPremium
Thanks to the growth momentum and rising stock markets, this year also saw two life insurance companies, SBI Life and HDFC Life, go for an IPO. Photo: Hemant Mishra/Mint

Coming week will shed light on how economic growth is shaping up. Macro-economic indicators such as the Index of Industrial Production, Consumer Price Inflation and Wholesale Price Inflation are scheduled this week.

Stocks continue to defy gravity. The first week of 2021 has been off to a good start with the Nifty 50 scaling new peaks. A pickup in economic activity is encouraging as the market’s uptick will get supported by earnings growth.

Of course, much of this rally has been possible due to the persistent high global liquidity. Global funds, including exchange-traded funds, are rebalancing in favour of India.

The dry run of the covid-19 vaccine rollout in several parts of the country is further encouragement. With both the vaccine and the slowing covid-19 cases in the country, economic activity could get a further lift in the coming quarters.

This week will also shed light on how economic growth is shaping up. Macro-economic indicators such as the Index of Industrial Production, Consumer Price Inflation and Wholesale Price Inflation are scheduled this week.

However, earnings expectations from the third-quarter are running high. Brokerages have pencilled in a sharp recovery and expect revenue to grow sharply by about 10% sequentially. Although input costs are rising, some of it could be passed on, which could further lead to sequential growth in earnings. But cyclical sectors such as metals may have an edge this quarter along with cement.

Tata Consultancy Services Ltd’s third-quarter earnings show a good rebound. The firm’s 4.1% sequential growth in constant currency was much higher than the Street’s expectations, which is a huge positive. The firm also beat margin expectations. As the results were declared after market hours, the market’s reaction when trading re-opens on Monday morning will be key.

Top Tier IT majors such as Infosys Ltd, Wipro Ltd and HCL Technologies Ltd will also declare their Q3 results this week. The sector is also expected to show good earnings growth as deal wins and digital ramp-ups drive earnings.

In addition, updates from the banking sector are encouraging. IDFC First Bank Ltd’s retail deposit growth shows a good jump, while retail loan growth is also superior. The stock gained 18% in the past month.

Even real estate is showing good resilience. Sobha Ltd is gaining from the ongoing consolidation in the sector with sales volumes improving 6% year-on-year. This is its best-ever quarterly performance.

Among other companies, Godrej Consumer Products Ltd’s could also see close to low-double-digit sales growth, its pre-results update shows.

Besides, the recovery in consumer discretionary companies may show the stress coming off. These firms suffered more post the lockdown as people spent more time indoors.

Pharma is upbeat too. But the third quarter will show whether pharma stocks will be able to sustain this re-rating. The Street is pencilling a good quarter, but the stocks are pricing in a lot of the earnings growth.

The stock of Tata Steel Ltd has been gaining momentum. With captive iron ore supplies, the firm remains insulated from rising raw material prices.

While there is a good case for earnings rebound, note that some of it also due to a low base last year. But as mentioned earlier, global liquidity remains strong.

The Biden Presidency is also expected to keep the liquidity taps flowing with expectations of further increases in stimulus. If that happens, global liquidity should remain strong, which means that valuations should remain supported.

But at about 21-22 times FY22 earnings, the price-earnings multiple of the Nifty 50 is not really beckoning investors. Having said that, any major dips due to disappointing earnings or a global correction, will be seen as a chance to accumulate better names that show earnings resilience in the third quarter.

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