How are you looking at the coming earnings season? What are the cues you are waiting for and which sector are you watching most closely?
Our expectation is that we will probably see a very sharp recovery in earnings which is the trend we witnessed last year as well in the second half as the economy unlocked from July onwards. While the first quarter earnings this year were impacted to an extent because of the lockdowns of the second wave that we had, from here on, we should see a very smart recovery across sectors and across companies in terms of their profit growth going forward. This will be apparent in the IT sector which will start the earnings season this Friday with TCS.
We should continue to see a very strong revenue growth and profit growth in those companies given the strong demand for IT services and the Cloud and digitisation theme globally.
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Likewise, banks which were impacted because of the decline in collection efficiencies due to the second wave of lockdowns, have gained back their collection efficiency significantly post the unlocking. We will see a significantly improved collection efficiency and asset quality numbers from banks as a whole. Overall the demand for the consumer sector has been equally robust though there could be some impact on margins because of the rising commodity prices.I do not think it would be meaningful enough to have a significant impact on earnings.
So net-net, on a broad basis, the earnings picture that we are seeing is that underlying demand from the consumer side remains pretty strong and there is a very strong underlying recovery in the economy and that underpins the bull market.
Are you concerned about the attrition numbers in the IT sector and the pressure that it puts on margins? Which companies do you think will pull ahead of the pack as early as this quarter?
We are not too concerned about the attrition in the sector. It is a short term headwind because of supply side challenges as demand remains very strong and these companies are facing higher attrition and sourcing talent has become a challenge. We think it is more a passing phenomenon and probably things should stabilise in a couple of quarters.
Having said that, over the last six months, we have seen a very sharp move in midcap IT companies. Our preference within the IT pack remains for the larger cap companies. We like Infosys and TCS. We think they will deliver industry leading growth and they have very strong drivers of levers for growth to continue while at the same time, expanding margins as well.
