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Rising commodity prices, shortage of coal and natural gas and news from Chinese real estate have made Indian markets volatile but the upcoming earnings season could provide a breather. “Even as global challenges persist; the Indian market continues to remain constructive with expectations of a robust Q2FY22 and improving high-frequency indicators. Also, Q3 being the festive season in India, is expected to lead to robust demand, leveraging which, the Indian Equity market should continue to outperform other emerging markets,” noted Axis Securities in a report.
Q1FY22 earnings resulted in an overall earnings upgrade primarily led by Metals & Mining. However, steel prices have not seen much action post Q1FY22 while input costs have moved up, prompting price hikes. According to Axis Securities, Q2FY22 earnings are expected to significantly support the Metals sector. Apart from the Metals, the IT sector should also see a robust quarter with Q2 being the strongest quarter for the sector. BFSI results will be crucial and outlook on NPAs (Non-Performing Assets) and growth will be critical. In our opinion, the Banking sector is likely to report healthy numbers, but the MFIs (Micro Finance Institutions) could continue to see stress. Auto sector numbers will continue to remain uninspiring, albeit on the expected lines. The Mid and Small Caps should report overall healthy numbers but the management commentary on the future outlook will remain critical.
Volatility rises
The fear gauge index India VIX increased by 27% during the month to the 18-19 zone, it is still below the long-term average of 22. The index is still nowhere in the spook zone of 30 which generally results in a significant market correction. While there are global challenges, Axis Securities believe a significant market correction seems unlikely at this stage. However, it is still important to manage portfolio risk by focusing on stocks having excellent earnings trajectories.
Value & quality to deliver
An analysis by Axis Securities shows that both quality and growth styles delivered in line returns. While momentum witnessed pick up during the month, growth continued to lag during the same period. It believes quality would prove to be a good theme going ahead as it outperforms the broader market during instances of rising volatility. Global volatility may rise as news from China continues to be mixed.
Earnings momentum is the key
“The earnings momentum continues to be the key factor for the market performance moving forward. While past quarters have seen strong earnings momentum which is expected to be sustained in Q2FY22 as well, the future outlook of the earnings trajectory remains more critical. BFSI being a crucial sector, FY22 earnings growth trajectory will hold strong if the sector manages to report strong numbers in the upcoming quarters,” stated the report.
Citing earnings momentum, the brokerage firms is bullish on ICICI Bank, SBI, Federal Bank, Equitas Small Finance Bank, Varun Beverages, Camlin Fine Sciences, Mold-Tek Packaging, Amber Enterprises India, Minda Corporation, Krishna Institute of Medical Sciences, Tech Mahindra, Bharti Airtel, HCL Technologies, Orient Cement, Ashok Leyland, Bajaj Auto.