Q3 earnings preview: Nifty profit growth pegged at 10%, best in 5 quarters

Combined net profit of 50 index firms estimated at Rs 1.14 trillion, led by commodity producers

After a good July-September quarter (second quarter, or Q2) that saw profit growth return to positive territory, brokerages now expect double-digit growth in the combined net profit of Nifty50 companies in the October-December 2020 period (third quarter, or Q3) of 2020-21 (FY21).

This growth is led by a big jump in the net profit of commodity producers in sectors such as metals and mining, crude oil, refining, and cement, among others.

The index companies are expected to report a combined net profit of Rs 1.14 trillion for Q3, up 10 per cent from Rs 1.04 trillion a year ago. If companies spring a surprise as they did in Q2, profits could beat the record high figure of Rs 1.15 trillion delivered in the September 2020 quarter.

On Friday, Tata Consultancy Services kicked off the earnings season with a bang, beating analysts’ estimates on all counts.

The Nifty50 companies’ combined net sales (net interest income in case of lenders and insurance companies) is expected to decline 2.5 per cent year-on-year (YoY) in Q3. This is still an improvement from the 8.1-per cent decline in their combined net sales reported for Q2, and the 26.9-per cent contraction seen in the April-June quarter.

For comparison, the combined net profit (adjusted for exceptional gains and losses) of index companies was up 6.9 per cent, while the combined net sales was down 0.2 per cent, on YoY basis, during the October-December 2019 period.

“The drivers of corporate earnings are changing at the margin, with the Q3 earnings expected to be led by cyclical sectors like metals and cement, even as health care is expected to post another solid quarter,” write analysts at Motilal Oswal Financial Services in their earnings estimates note.

The brokerage expects its universe of companies’ combined profit after tax to grow 17 per cent YoY in Q3. Excluding metals and cement, their universe is expected to post just 5 per cent profit growth for the quarter.

The analysis is based on the earnings estimates for Q3FY21 by equity brokerages, including Motilal Oswal Financial Services, Kotak Institutional Equities (KIE), Edelweiss Securities, IDBI Capital, Antique Stock Broking, and YES Securities.

For banks and non-banking financial companies, net sales reflect their net interest income, while it is total income from the sale of goods and services (net of indirect taxes) for other companies. Net sales and profit after tax for Q3FY21 are based on brokerage estimates, while it is reported numbers for the earlier quarters.

Among individual companies, Tata Steel is expected to be the top contributor to Nifty earnings’ growth in Q3, followed by Indian Oil Corporation, JSW Steel, Bharti Airtel, and Dr Reddy’s Laboratories.

Tata Steel is expected to report a net profit of Rs 3,315 crore in Q3FY21, against a net loss of Rs 1,085 crore a year ago. Together, the top three companies are expected to account for 90 per cent of the Nifty index’s incremental growth in earnings in Q3.

Excluding oil and gas and metal and mining companies, the Nifty’s combined net profit is expected to grow by a modest 2.9 per cent YoY in Q3FY21 — slower than 6.1-per cent YoY growth recorded in the September 2020 quarter. In comparison, these companies’ earnings had grown 18.7 per cent YoY in Q3 of 2019-20.

KIE expects a strong showing from automakers and banks as well during the quarter. “We expect strong YoY increase in the net income (profit) of automobile (strong pent-up demand and higher profitability), banking, construction material, metals and mining, and the pharmaceutical sectors,” write Sanjeev Prasad, Sunita Baldawa, and Anindya Bhowmik of KIE in their earnings estimate report for Q3.

The KIE analysts expect the combined net profit of S&P BSE Sensex companies to increase 2 per cent YoY and 12 per cent QoQ quarter-on-quarter (QoQ), and that of the Nifty50 index by 19 per cent, both YoY and QoQ.

Analysts at Edelweiss Securities, however, show some concern about the top-line performance. “The profit bounce is likely to be led by cost rationalisation and still lagged benefits of lower input prices, as top-line growth is still likely to be flat YoY,” write Prateek Parekh, Aditya Narain, and Padmavati Udecha of Edelweiss Securities.

A combination of poor top-line growth and cost rationalisation, including employee cost, could however hit domestic consumer demand in the January-March 2021 quarter.

“Nifty earnings are likely to significantly outpace nominal gross domestic product growth after many years, owing to global reflation and aggressive cost rationalisation by corporates. While the former is welcome and much needed, the latter could potentially weigh on domestic demand,” warn analysts at Edelweiss Securities.