Jefferies say Sep'20 results season seeing reversing the EPS downgrade trend. A key takeaway from the Q2 FY21 is that the result season has seen a strong start. Upgrades to FY21 earnings outweigh downgrades. Asset quality trends are also better than the worst fears for banks. As Indian economy heads to normalcy and India avoids lockdowns, dips should be buying opportunities.

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Results better than estimates:

Of the 53 Sep'20 quarter result notes, 79% or 42 results out of 53 came above analyst estimates. Results in IT, select industrials / discretionary and materials (cement, metals, PSU oil) have seen large beats. Though all sectors, on balance, have reported better than estimated earnings; many due to margin surprises. Only about 10% (5) results were below estimates and another 11% (6) were in line mostly distributed across consumer & non-lending financials.

Upgrades outnumber downgrades 6:1:

Earnings upgrades (43 or 81%) are inline with the earnings beat. Out of the 53 cos, 10%+ earnings upgrade to FY21 EPS for 19 stocks; vs. Nil stocks which saw >10% downgrade. Earnings for all the IT companies and cement companies reporting numbers so far have seen upgrades. Earnings have also been upgraded for most banks, industrial / discretionary names. For these 53 stocks, the consensus has also upgraded earnings for 46 (87%) of them during the results season (October). Nifty consensus earnings for FY21 / 22 are up by 1.7% / 1.6% since their bottom a few weeks back.

Interesting takeaways:

The largest 5 IT companies all saw a beat to estimates and consensus raising expectations by 3-8% for FY21 and 4-7% for FY22. The IT companies have announced annual salary hikes as well as bonuses to be paid for the previous year. Hiring by IT companies has resumed with the 4 tech majors (TCS, Infosys, Wipro and HCL Tech) seeing headcount increase of 17k QoQ (1.7%). This comes after two quarters of decline.

The 3 cement companies in coverage (ACC, Ambuja Cement and Ultratech Cement) which reported results saw consensus upgrading FY21 earnings by 11-14%. Upgrades are largely margin driven, helped by lower fuel costs and somewhat better pricing.

Consumer staple company earnings have been maintained largely flattish by consensus, though Colgate (+6%) has seen the highest upgrades.

Within banks, Axis Bank (3%), ICICI Bank (4%) and Kotak Bank (9%) have seen significant upgrades from consensus. The banks have broadly surprised positively on asset quality as the Covid-19 related provisioning seems to be contained now. The collection efficiencies have also risen to 90-98% of the portfolio, indicating eventual restructuring / stress should be contained.

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Property companies have reported good performance on the residential front with pre-sales up YoY for DLF, Sobha Developers and Oberoi Realty; demonstrating improvement QoQ.