The earnings season has kicked off and is slowly gaining pace. A few top companies have already declared their results with several scheduled to release in the coming few weeks.

Up until now, it has been a mixed bag of results. On one hand, the IT giants have failed to light up the markets, the banking sector on the other hand delivered eye-catching numbers.

So, in order to understand what we can expect from the earnings season we sat down with Dharmesh Kant, Head of Equity Research, Chola Securities, to get his take on India Inc’s Q1.

The Results So Far

Starting with the IT sector results, Kant said, “As far as the IT companies are concerned, the numbers that have come out, they have not been a disappointment. But at the same time, I mean, the expectation was that some encouraging commentary will come out or outlook will come out as far as the guidance is concerned. So that has not happened.

TCS just managed to score numbers in line with the expectation and the deal wins for the quarter was at $10.2 billion, which was just a shade better than what they did in the last quarter. Nothing great about it. And the management sounded a bit cautious. It was not cautiously optimistic, but rather they were cautious about the future outlook of how the discretionary spending is going to pan out. The same was the case, if you look at HCLTech or even Wipro for that matter. Wipro reported good order book deal wins, but it was lower than what the expectation was.

So IT per se is still stuck. We have seen some trading bounce happening in most of the companies pre and post-announcement but that has been mainly on the back of positive developments in the US economy. But nothing fundamentally exciting.”

Talking about the Banking sector Kant said that barring Federal Bank and Bandhan Bank, all (HDFC Bank, Central Bank, IndusInd Bank) have reported a very good set of numbers. “IndusInd Bank, HDFC Bank, Central Bank, and Bank of Maharashtra, have reported better, healthier NIMs, Net Interest Income growth. And at the same time, the asset quality has been impeccable. I mean, less than 1% kind of a net NPA. I mean, a few years back, you couldn’t even dream of that. So, the credit market remains robust.”

The Results To Come

Several sectors including automobile, chemicals, and pharma will see companies posting earnings for the quarter that ended June over the next few weeks. Talking about these stocks, Kant shared with Benzinga India what investors can broadly expect from these upcoming results.

“Automobile industry will report a good set of numbers, I mean better than what they have reported earlier just because of the lowering of input prices and at the same time price hikes have been taken by most of them. The numbers might not be that good on the volume front because volumes more or less have been muted.”

Auto stocks have been performing tremendously well this year. The Nifty Auto Index has gone up over 20% on a year-to-date basis. Several auto giants including Tata Motors, Bajaj Auto, and Hero MotoCorp have gone on to hit record highs this year. So, a question that arises is whether all the upside is already priced in for the auto sector. Answering that, Kant said, “What has happened with most auto companies, if we talk about a HeroMoto Corp or a Bajaj Auto, it has been the announcements of these companies’ tie-ups like with Harley Davidson and Triumph that has played out because people are discounting the future price now. But I think there would be more of a stagnation as far as stock price performance is concerned because fundamentals will be doing a catch-up rally.”

“Tata Motors is a totally different play. It’s a JLR play. One should be looking at Tata Motors from JLR’s point of view because 85% to 90% of the revenue and profitability comes from the JLR business now.” Adding further Kant said, that Tata Group company’s EV segment also holds a lot of potential.

Moving on to the Pharma Industry, Kant said that Pharmaceuticals are also expected to deliver better numbers because the volume share has gone up in the US. Adding further he said, “At the same time, the lowering of prices which was happening at a much faster rate has stalled. So this quarter will be the first quarter when most of the pharma companies will have stable blended realisation with strong volume growth. So that will add to the top line and operating margins and all will remain stable.”

His outlook for the Chemicals industry isn’t the same. However, Kant said that the chemicals industry is very diversified and vast and clubbing them in one would be difficult, but in general, he expects the numbers to be subpar. “Chemicals are likely to report a bad set of numbers just because Europe is in a bad shape. So most of the pigments, dye, all these manufacturers are going to face the heat.”

Kant added that while the Q1 numbers will be bad if the guidance from the companies comes out strong considering the positive economic outlook changes internationally (in the US and Europe), bets in the sector can be a dark horse for investors.

“Real estate, we have seen the numbers, the pickup has been very good and all these companies enjoy the tailwind of lower input prices. So I mean all the companies who are into civil construction as well as infrastructure like roads and ports, they will deliver a better set of numbers.

Defence companies have also reported great order wins but to which quarter they book the revenue is, I mean, that is known only to the company because normally it takes nine months to one and a half years for the order to be completed and executed. But the order book is strong and Make in India is working out great for them.

So, to sum it up, Q1 looks very encouraging and as we move forward Q2 and Q3, the hope will be there for RBI rate cuts to come into play.”

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How Is It Looking For New Age Tech Stocks

Regardless of their performance at the bourses or on finance, new-age tech stocks have always captured the interest of investors, especially retail investors. These stocks have also had a pretty strong year so far. Shares of Zomato, Paytm and Nykaa have run up considerably over the past few months.

So, how is it looking for them ahead of Q1? Kant said, “It’s a very interesting space to look at. New-age stocks, one has to look at what is the type of functionality or the business they are into like for example, Nykaa – I don’t think this company is going to do well in the near future. But Zomato, things are picking up.

Paytm is a different play altogether. You should not be looking at Paytm from, you know, just a payments perspective. You should be looking at Paytm from a fintech perspective. So, the rate at which, I mean, loan sourcing through Paytm is happening is phenomenal. They have already grossed 10,000 crores of, loan disbursements through them. And that is the space where, I mean, the path to profitability is being built into and it will build into in a much, much greater way. So one has to look at the new-age companies from company by company, rather than, you know, clubbing them all together and taking a basket call.”

The IPO Frenzy Is Back?

The markets also saw quite a few IPOs floated during the first quarter with many garnering huge interest. Mankind Pharma and IdeaForge are two examples of IPOs that got an overwhelming response and a bumper listing. A report from Ernst & Young released late last month stated that contrary to global trends, India’s stock exchanges have taken the lead in terms of the number of initial public offers (IPOs), surpassing all other countries. The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) have collectively listed 80 firms by June 2023, marking a remarkable 33% increase compared to the 60 IPOs launched during the previous year. So, are IPOs back in trend?

“Yeah, definitely it’s back in trend and retail investors are very hungry about IPOs. So now there are two parts to it. One is a trading part, you take a bet on the IPO and you seize the opportunity on the listing day and then you’re out of the stock. My only fear is that most of the IPOs which are coming are priced to perfection at the issue price itself and there is no juice or anything left. And when the listing happens because of a surplus of liquidity and lack of supply, there’s a huge demand, and the prices shoot up like anything.

So fundamental justification of those stock prices to the earnings capability is a big grey area. So if you are playing a listing kind of a play, you can enjoy your ride. But if you are putting your money into an IPO thinking of holding it for 3, or 5 years, then I do not think you will make any meaningful money out there. So a better way is to let the stocks get listed. And then based on their numbers and performance and the guidance which they have given before the listing in their prospectus and the commentaries which the management makes, take an informed call and buy it from the secondary market if you want to have a 5-10 years kind of long-term play.”

The Bull Run

The markets have been on an impressive bull run with benchmark indices hitting all-time highs. But can the rally sustain? Kant thinks that the bull market is here to stay for a while. He adds that Make In India combined with conducive government policies have worked well for the markets. “So we can have a correction in this market definitely and a healthy correction. As far as the sustainability of the current momentum, I think it will continue for three, or four months more, till Diwali. In between you can have a 500-1,000 point correction in NIFTY, but that would be only a correction to be bought in. Because a lot of money is sitting on the sidelines, I mean, most of the HNIs and super HNIs, have just booked profit as the market went up. And they are now waiting for an opportunity to invest the money back. Because I mean, the path is very clear, you have to be long on this market.”

When asked for a longer-term prediction, Kant said, “I would say that 23,000, 24,000 by FY25 is a getable target for Nifty 50, sensing the present environment unless we have a major macroeconomic factor like a pandemic or a war come into play. But under normal course, 23,000- 24,000 is a likely target.”

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Note: The interview was conducted on July 19, 2023.