Home >Markets >Mark To Market >Q4 earnings will be spectacular, but investors should watch out

India Inc. is poised to report blockbuster earnings in the March quarter of FY21. Thanks to last year’s low base, sales and profits for some firms could rise exponentially. For instance, Kotak Institutional Equities estimates net profits for the BSE 30 and Nifty 50 indices to increase 55% and 125%, respectively, year-on-year in Q4. On a sequential basis as well, corporate earnings are expected to see a modest improvement.

But as they say, past performance is no guarantee of future results, especially in the backdrop of the fast-spreading covid infections. Therefore, analysts said investors should not read too much into the headline numbers; they should focus on management commentary instead.

“While the earnings momentum looks good, it is difficult to predict how things will pan out for corporates given the second wave. So, commentary on dem-and outlook is key," said Sahil Kapoor, chief market strategist, Edelweiss Investment Research.

Margins at risk
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Margins at risk

Not just sales and profits, the Street is expecting margins to shine as well, despite input cost inflation. Nomura Inc. analysts said consensus Ebitda margin forecasts of 22.3%/22.7% for FY22-FY23 is 200 basis points higher than the past five years’ average. These estimates are excluding financial, and oil and gas companies. One basis point is one-hundredth of a percentage point. Ebitda stands for earnings before interest, tax, depreciation and amortization.

Of course, sustained cost savings will be a key factor, which is expected to aid margin growth. Higher operating leverage might also support the margins of some companies. Even so, Nomura analysts cautioned that operating and gross margin expectations are elevated.

In a bid to protect margins, manufacturers of automobiles, paints, cement, steel and tyres, among others, have recently announced price hikes. However, investors should note that the price hikes will take some time to reflect in their earnings. Also, if raw material costs continue to increase, then the quantum of current price increases may not be sufficient. But with the second wave of covid clouding demand outlook, it remains to be seen how firms tackle the cost pressure. Jitendra Gohil, head, India equity research, Credit Suisse Wealth Management, warns that though commodity-related firms have taken price hikes, a majority of them will see some margin pressure.

On the bright side, increased pace of vaccination can turnaround the situation for India Inc. earnings. But so far, data on that front isn’t encouraging. The latest health ministry data shows that the cumulative number of vaccine doses administered in India has crossed 90 million. But taking into account India’s large population, this is minuscule and needs to accelerate.

“The market is drawing a lot of hope from the vaccination drive and pricing in a best-case scenario, but we feel that this gung-ho sentiment would take a back seat as the pace of vaccination is slower than what it should be," Kapoor added.

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