The earnings season is here again.

Several companies are scheduled to post their results for the September quarter in the next few weeks. The markets have been on a record run this year, and investors are hoping that the upcoming results push the positive sentiments further.

So, how is India Inc.’s Q2 looking? We sat down with Dharmesh Kant, head of equity research, Chola Securities, to understand what one can expect from the earnings season.

How Is The Market Looking?

“This market as of now is riding a liquidity wave and liquidity through SIPs from retail investors, investments from high net worth individuals (HNI) and super HNI investors. So there is no negativity in the market, there is no bearish sentiment in the market,” this is how Kant describes the current market sentiment.

He adds that the market is unlikely to go through any meaningful downturn or correction in the near term. “When I say meaningful, I mean at least a 10% kind of correction on the index level. And if you take the recent high at around 20,100. So 10% means 18,000 or below that, which seems fairly unlikely.”

Talking about the recent escalation of tension between Israel and Hamas and its impact on the stock markets, Kant said that while the conflict is unfortunate and worrisome, it having a substantial impact on the Indian markets is highly unlikely.

He adds that the market currently is somewhat immune to geopolitical tension unless there is a major supply disruption.

When asked amidst all this does he still see the Nifty climbing up to 21,000 by Diwali, Kant said he still sticks by that outlook “going purely by the economic developments in the country.” He adds that as long as there aren’t any severe geopolitical developments or unfortunate events, the Nifty 50 looks pretty good to hit 21,000 post Q2 numbers.

How Is It Looking For The Heavyweights?

Heavyweight in IT and auto sectors have had quite different trajectories this year. While auto stocks have really generated solid returns for investors, IT stocks have remained subdued for the better part of the year. So are things going to change this earnings season for IT behemoths?

Kant doesn’t think so. He notes that while IT stocks have recovered from the lows in the past few months, they might have to suffer for a bit more. “The stock prices have rallied from the bottom on the hope that things will improve and they will improve going forward, but not now,” he adds.

“Revenue and profits would have a low single-digit kind of growth for most of the large IT players, there may be a few outliers, but in general, this is going to be the trend.”

When asked about whether the guidance from the IT companies can be upbeat this time around, Kant remarked that he would be surprised if that happened. “At best they can maybe maintain the status quo,” he adds.

The outlook for auto is more upbeat.”Automobiles are likely to report a good set of numbers. We have seen the quarterly update for most of the automobile manufacturers and it looks good.” He says that based on that Eicher, TVS Motors, Maruti, and Ashok Leyland, are the companies that can report a very strong set of numbers with around 12% to 15% kind of revenue and profitability growth followed by improvement in margins because input prices have been largely lower.

But, the auto stocks have already seen quite a run in share price this year, so will the good numbers help continue the momentum? Kant says that the companies are on track to carry on with the upward momentum. “This time Q3 is likely going to be better, far better than the Q3 of last year because most of the festivals are falling into this space. So the continuity of upward traction in all these companies is likely to be there post the earnings announcement.”

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The Railway Stocks

If there was a group of stocks that created the most buzz during the last quarter, it was the railways stocks. Public, as well as private railway companies, continued their bull march backed by strong order wins. So with all this interest, we asked Kant what investors could expect from these stocks during the earnings season.

“The companies which cater to the railway infrastructure space, they should not be looked at on a quarter-on-quarter basis or even on a year-on-year basis won’t be fair on them because most of the projects which they implement are multi-year projects. 

I mean the numbers and the type of order book they are sitting on and the type of orders expected in the coming future is huge. The entire railway sector is going through a revamp. It’s an overhaul of the system with new technology coming into place.” 

He added that while the stocks have run up pretty high this year, there is still upside left in the longer term. He explains that the government railways stocks are still trading at a much lower valuation than their private peers. “For example, RVNL is a case in point. It is still trading at 27-28 times PE multiple,” he adds.

Losers And Gainers

“I think the infrastructure sector is a space where numbers will be pretty strong, be it road construction or highway or port, all these infrastructure companies will continue to do fairly well. Larson, NCC, PNC Infra and all these companies will come out with a good set of numbers because execution has been strong and at the same time input prices have been lower.”

Apart from infra Kant expects cement, real estate and power stocks to report a good set of numbers this earnings season. “The cement sector will come out with a good set of numbers. 12% to 15% kind of volume growth is expected in general for the sector as a whole. Power would be doing fairly well. The stock prices have moved up for most of the power-producing companies, but the numbers will again surprise the street. I think a strong 20% kind of growth is expected from all the power sector companies be it Tata Power, JSW Energy etc.”

“Real Estate Q2 was phenomenal around 27, 28% average sales growth was seen across the board, be it affordable mid-segment or the premium segment.  So these companies will report a very good set of numbers and they have been enjoying the lower input prices. So sweet spot for real estate companies as well.”

Coming to sectors that do not look good this earnings season, as per Kant apart from IT, FMCG, and Pharma may disappoint this time around. “FMCG space should see single-digit kind of growth in their top line and bottom line. And that has been reported by companies like Marico and Godrej in their quarterly update. So that gives an indication about the overall FMCG space.”

Kant expects Pharma’s revenue to grow by 10% to 12% at best whereas profitability growth can be around 120 or 200 basis points higher “just because the input prices have pulled off.” 

The IPO Market

India’s IPO market has been quite a buzz this year. We have seen several companies getting great response from investors and even performing quite well at the bourses. “Any bull market, this is a normal feature. Everybody wants to in cash on the ongoing bull run. But I have seen this time around is that the percentage of good companies coming out with a fair value and leaving something on the table for investors to cash in on the listing gain was pretty high. So, I mean, I have personally covered two, or three companies in the IPO,” Kant explained.

Elabpraing further he gave expamles of EMS Limited and JSW Infra that floated their IPOs earlier this year had fairly priced their issues and the investors had the right opportunities to make some gains. “This is really healthy for this IPO market.”

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_{Note: The interview was recorded on Oct. 10.}