Earnings downgrade on cards post-second wave

An earnings downgrade looms over Indian companies in the first quarter of

FY22 given the second

Covid-19 wave disrupting economic activity, according to brokerages.

April automobile sales data are already indicating the pandemic impact, analysts said.

"The market has largely ignored the short-term negatives of the pandemic but may want to look deeper into the longerterm implications of and lessons from the pandemic,"Kotak Institutional Equities (KIE) said in its market strategy report.

The second wave has shown signs of slowing down in the last few days and infection numbers have started falling but it's too early to calculat .its impact on the GDP and earnings.

"The impact on the economy and earnings will be clearer over the next one-two months depending on the duration and nature of lockdowns. There is little scope for earnings upgrades barring global commodity sectors and in fact, we could see earnings downgrades," KIE analysts said.

"4QFY21 results have hardly shown any positive surprises and a combination of lower-thanexpected economic activity in 1QFY22 and margin pressures across sectors will likely result in earnings downgrades," it said.

So far the market has overlooked the second wave’s impact but it was now time to go much deeper, according to analysts "The market has largely looked through the second wave given a consensus view of the limited economic and earnings impact of this wave. However, we believe the market may want to look deeper into three issues—(1) potential upward pressure on domestic bond yields given increased pressure on government revenues; the RBI may struggle to control bond yields, (2) India’s long-term structural challenges due to under-investment in education and healthcare and (3) governments’ (central and states) postpandemic stance on economic and social issues,"KIE said.

"April 2021 auto numbers have started showing the impact of lockdowns which has put brakes on the recovery. Two-wheeler sales are higher in this period and hence channels had stocked up. But, lockdowns happened in states which contributed 25-30 per cent of the sales.

“Commercial vehicles were the worst hit, tractor sales have also declined sequentially, indicating the pandemic impact in the hinterlands," said Centrum Research.

"We expect May to be subdued with more states taking lockdowns and as original equipment manufacturers(OEM’s) take maintenance shutdowns.

“Exports have done well with positive outlook," Centrum analyst said.

Only metal stocks may have brighter outlook given the global demand and rising steel prices, according to KIE.