Mumbai: September quarter earnings are signalling a recovery, a distinct rebound from the preceding three months when a nationwide lockdown had brought economic activity to a near standstill.

Post-earnings management commentaries show companies are confident about demand revival, and gradual recovery from the sharp damage suffered in the fiscal first quarter. A Mint analysis of 170 listed companies that have announced fiscal second-quarter earnings showed that net profit, adjusted for one-time profit or loss, in the three months to September grew at the fastest pace in four quarters at 6.23% from a year ago. That compares with an 18.9% decline in the June quarter. These firms reported adjusted net profit growth of 10.74% in the same quarter last fiscal, according to data provider Capitaline.

Similarly, net sales growth also quickened to a five-quarter high at 4.91% in the September quarter after declining 14.31% in the preceding three months. The review excludes banks, financial services firms and oil and gas companies as they follow a separate revenue model.

The earnings season has started on a positive note, said Rusmik Oza, head of fundamental research at Kotak Securities. “Sales of 17 Nifty companies has been 11% below estimates, but net profit has been 12% above estimates,” he said.

In the quarter to September, both operating profit margin and net profit margin of these firms widened, respectively, to 26.7% and 15% from 24.9% and 12.7%in the previous quarter.

“Cement and IT stocks reported better than expected numbers. The second quarter has seen sustained earnings momentum in IT, resulting in an earnings upgrade. Management commentaries remained upbeat and indicate the pandemic has acted as a tailwind for the sector as enterprises are undertaking cloud adoption/digital transformation at a faster pace,” said Deepak Jasani, retail research head, HDFC Securities. “FMCG, insurance, cards reported subdued numbers while hotels and retail reported expectedly bad numbers.”

Beyond IT services, faster revival is seen in sectors such as two-wheelers, cement, metals and paints, while discretionary spending is gradually returning after the severe slowdown in Q1. Asian Paints saw 6% domestic revenue growth led by 11% growth in volumes in Q1. Bajaj Auto saw 6% y-o-y volume growth in domestic two-wheeler sales led by premium motorcycle segment.

“The cement sector has displayed one of the best performance, beating estimates on all counts like sales, Ebitda and net profit,” added Oza.

According to Oza, management commentaries are quite positive with a better outlook for the festive season. Oza expects 15-16% earnings growth in the two remaining quarters of FY21 but cautioned that there are still risks to recovery.

“If demand falls short of expectation and inventories remain high in the system, then it could hamper production growth in the coming months while any second wave of covid leading to fresh restrictions akin to that in few European countries is a big risk to earnings growth,” Oza said.

India transitioned in the September quarter from localized lockdowns to widespread opening up, with very few sectors now under restriction ahead of the festive season. “Q2 FY21 has been characterized by improving data points on multiple fronts. Pent-up demand and inventory filling ahead of the festive season are helping the underlying recovery. The southwest monsoon has been bountiful and widespread, creating a strong backdrop for the rural economy,” said analysts at Motilal Oswal Financial Services.

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