Early Q2 results better than expected but market rally may lose steam

EPS for Nifty50 firms has risen just 1 per cent in the month so far

The early-bird results have been better than expected with companies showing gains from the unlock.
 

But they have done little to shore up the Nifty50 index’s underlying earnings per share. In the first two weeks of the earnings season since Tata Consultancy Services (TCS) declared its results on October 7, the Nifty earnings per share (EPS), on a trailing 12-month basis, is up just around 1 per cent from about Rs 344 at the beginning of the current month to Rs 347 at the end of Friday.
 

Analysts say a lack of an earnings momentum in the Nifty companies could be one of the reasons for the recent range-bound movement in the index after nearly a 1,000-point rally, led by technology majors, over two weeks in the run-up to the TCS results.
 

However, after the TCS results, the market has moved in the narrow range of 11,900-12,100.
 

“The market has so far rewarded companies for tremendous growth in net profit and net sales on a quarter-on-quarter basis. Earnings for most companies have been far better in the September quarter than in the previous one, but year-on-year (y-o-y) growth has been sluggish, which affects the long-term earnings trajectory,” said G Chokkalingam, founder and managing director, Equinomics Research & Advisory Services.
 

In all, 16 index companies have so far declared their results for the September quarter.
 

Of those, half cranked up y-o-y growth in net profit (excluding exceptional gains and losses) while the rest reported declines.
 

On a sequential basis, however, 13 of the 16 saw a rise in earnings and only three companies reported a contraction.
 

The combined net profit of the 16 was up 1.3 per cent y-o-y during Q2FY21, an improvement compared to a 3.8 per cent decline in Q1FY21 but a slowdown seen against 16.7 per cent in Q2FY20.
 

The combined revenues of these 16 was up 8.5 per cent y-o-y during Q2FY21 against a 1.6 per cent y-o-y decline in the June quarter and 9.3 per cent y-o-y growth in Q2FY20.

 

In comparison, the combined net profit of these index companies was up nearly 20 per cent on a quarter-on-quarter basis while revenues increased 12 per cent during the period.
 

There is now a fear of contraction in Nifty’s earnings per share as more companies declare their results in the coming weeks.

“Early bird numbers are dominated by IT, retail banks, and FMCG but as more manufacturers, energy producers and corporate lenders declare their results, overall index earnings could start to shrink,” said Chokkalingam.
 

This could put pressure on stock prices and trigger a market correction. Chokkalingam expects a correction up to 10 per cent at the index level by the end of December.
 

Others, however, found this very pessimistic.
 

“Most key results have been on expected lines and indicate that recovery in corporate earnings is on track. The Nifty earnings have bottomed out and they can only improve from here on,” said Dhananjay Sinha, head (research), Systematix Institutional Equity.
 

The index is trading at 34x its trailing 12-months earnings per share, slightly down from its record high valuation of 35x around a week ago.
 

If the corporate results in the latter half of the earnings season turn out to be lower than expected, the current valuation could turn into strong resistance for the market, limiting the gains for investors.