The December quarter was another strong quarter, beating expectations across most sectors, led by margin surprises. Sales also continued to rebound in Q3 at a faster pace than costs post the lockdown.

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In a results review note, HDFC Securities pointed out that the Q3 margins beat estimates across multiple sectors such as Cement, IT, Chemicals, Paints, Durables due to cost efficiencies and improved pricing power.

It added that the festive season and unlocking of the economy led to a sharp

demand rebound and larger companies gained market share. Collection trends also improved for lenders while the commodity costs rising sharply helped oil and metals sectors while gross margin pressures were visible in autos/durables etc, it stated.

The brokerage's preferred sectors continue to be IT, Chemicals, large Banks, Cement, Consumer Durables, Gas, and Insurance while it remains underweight on Consumption (Staples, Discretionary and Autos).

Its large-cap picks in the model portfolio include Infosys, ITC, SBI, SBI Life, ICICI Bank, Axis Bank, L&T, Bharti.

Within mid-caps, it likes Persistent, Max Life, Gujarat Gas, Radico, Crompton Consumer, Alkyl Amines, Galaxy Surfactants, JK Cement, and KNR Construction.

Going ahead, HDFC believes that the markets would focus more on QoQ trends in revenues and costs compared to Q2 and Q3 levels due to the positive base effect from Q4. Given the sharp rally in markets and Nifty valuations at ̃22x FY22 PE, absolute upsides look capped at the index level, it added.

However, it still sees a positive risk-reward on the economy-facing sectors and spot bottom-up investment ideas across most sectors for the next 12 months.

(Edited by : Abhishek Jha)