We are stepping into the earnings season in a bloated market. Do you think the scope for downgrades is more likely and bigger than upgrades this Q1?
This quarter will again be a tale of two halves in the sense that all export-oriented companies will see an earnings upgrade. Domestic-focused companies, other than healthcare, will see some kind of a downgrade. So it is the strong upgrades from export-oriented companies that will continue to lend support to the market. The disappointments are clearly factored in. This lockdown was unexpected and had brought down estimates.
Besides pharma and consumer discretionary, where else do you see a material growth in earnings?
For Infosys, the revenue will grow by about 13-15%. HCL Technologies will grow in double-digits. With the unlocking of the economy and acceleration in adoption of cloud technologies, the demand for jobs is phenomenally strong. So that translates into strong earnings for these companies. The valuations are less important because you will see a continuous upgrade of earnings for technology companies. The same story holds good for chemical companies. It also holds good for auto ancillaries who are into exports.
What is the expectation from TCS?
TCS will probably see a marginal hit in its margins because of a higher wage cost. A higher wage cost is actually a fantastic sign of the underlying demand that these companies are experiencing. Attrition rates have gone up. Depending on the size of the company, it ranges anywhere from 13-15% to 17-18%. It is a very healthy sign of the amount of demand for IT services. I think TCS will still beat its earnings expectation.
What explains Reliance’s underperformance since its pre-AGM day?
It is just a matter of time. They are talking about fresh capex for building solar farms, which is going to drive the next leg of growth from Jamnagar. Its ROEs and other metrics will obviously be hit during the capex mode. But that is more of a temporary thing because any infrastructure related project, whether it is power generation or oil refinery, take time. Building a solar farm or a gigabit farm takes years. Therefore, there will be a capital build-up and ROE erosion. So Reliance’s underperformance is partly reflecting its capex investment. But it is a matter of time when it starts its upward journey again.
