How should investors track corporate results?
In the short run, a market is a voting machine but in the long run, it is a weighing machine–Benjamin Graham
So true! Markets are driven by sentiments in the short run, but in the long run, factors such as governance, revenue growth and profitability drive stock prices.
India Inc. has started announcing quarterly results. According to the Business Standard database, 112 companies have so far declared their Q2FY20 numbers. These companies have collectively reported revenue growth of just 5.95%. Nonetheless, their net profit has jumped 16.63%. This suggests, while companies haven’t seen any major uptick in demand, efficient ones are able to improve their profitability through better management and cost controls.
Does that mean companies growing at better than average rates are doing well?
Not necessarily. One size doesn’t fit all. You can’t simply go by the top line and bottom-line growth in percentage term. Different industries grow at different paces. Besides, there are industry-specific factors to watch out for.
But the moot question is how should you analyze the performance of companies?
Use industry specific parameters.
For instance, when analysing banking stock, you should be mindful of gross new slippages. After all, evaluating a banking stock is about balancing the growth and quality of assets. Sometimes, conservative banks provide more than what’s required to cover for potential bad assets, but some aggressive banks may under-provide. In this case, banks making higher provisions will report lower profits and the aggressive banks may have higher profits. In this case, going merely by profit growth would be harmful for your portfolio. Usually, Provision Coverage Ratio (PCR), which is an indicator of provisions made to cover bad assets, of over 60% is considered good.
Similarly, you should also consider loan book growth (both on Quarter-on-Quarter basis and Year-on-Year basis), relative Price-to-Book (PB) valuation and potential NPAs while analysing banking stocks.
Key matrix to track corporate results
Parameters change when you are analyzing auto and FMCG stocks. Here, volume growth matters a lot and so do average realizations. Rural-urban break-up helps understand factors that affect the company’s revenues. Moreover, factors such as new launches and inventory levels help understand demand strength. Since seasonality factors affect revenues and profits of companies relying on consumer discretionary spending, Y-o-Y performance is a more reliable indicator than Q-o-Q. White goods and auto companies see a major surge in demand during the festive season, don’t they?
Some sectors are less affected by the performance of the domestic economy since they are export-oriented. In India’s case, Information Technology is one such sector. Indian IT majors derive a bulk of their revenues from global markets and thus are affected largely by the currency fluctuations and spending trends of global corporations.
So, for instance, if the Indian Rupee depreciates 10% against US Dollar; revenue from exports of an Indian IT company can accelerate 10% in Rupee term. Apart from the currency movement, new deal wins, revenue visibility, dependence on top-5 clients and margins among others are crucial factors to watch out for while analyzing IT company results.
Contrary to this, domestic economic performance vastly influences the quarterly earnings trend of cement and infra companies. When the economy is passing through a rough phase, growth rates of companies belonging to these industries moderate.
In the case of cement stocks, volume growth is a better indicator than just revenue growth. Further, analyzing the divide between revenue from government contracts and the retail segment gives an idea about government spending and underlying trends in the real estate segment. Cost per tonne and EBITDA (Earnings Before Interest, Tax and Depreciation and Amortization) per tonne hint at the fluctuation in raw material prices.
Sometimes you need to dwell deeper. Infra companies usually declare their order book position along with quarterly numbers, but unless you know the Book-to-Bill ratio, you won’t understand how efficient the company is in collecting its dues from its customers. If the customer is the government, this ratio can give additional information about spending/fiscal management trends of the government and perhaps the liquidity situation in the system.
Talk of refineries and stock analysts will start searching for Gross Refining Margins (GRMs). Why is this indicator so crucial? Because it gives you information about crude oil prices and marketing prices. Overall profitability of a refinery depends on GRMs. Volume growth matters for refiners too.
You see, we have broadly discussed key matrices you should use while analyzing corporate results, but this isn’t an exhaustive list of parameters. You might use additional parameters, or develop your own models.
Nonetheless, the stock price performance of a company largely depends on what the street was expecting from a company. If investors expected a company to grow at 15% and if it reports 20% growth; the stock might rally, post results. But it might fall if the expectations were of 25% growth. Thus, you should never go only by just the absolute growth numbers.
As they say, stock markets are forward-looking. So, when you plan to invest in a stock, don’t just look at today’s market performance or even one quarter results, for that matter.
We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.