The December quarter results were muted because of the overhang of trade tensions between the US and China, but largely in-line with estimates.
According to IndiaNivesh's estimates, Nifty companies (excluding banks, financials, and Tata Motors) reported revenue de-growth of 3 percent in Q3FY20, while total net profit of these companies saw a fall of 5 percent year-on-year.
Among the top 500 companies, over 20 companies turned loss-making in the December quarter, data from AceEquity showed.
So, what should investors do with these stocks?
Only a handful of companies have strong fundamentals to pull them through in a tough period like the one we are going through now while the rest could stay under pressure.
“Out of these 25 companies, there are only 4 companies — Aditya Birla Fashion and Retail, BASF India, Blue Dart Express, GlaxoSmithKline Pharmaceuticals — which have strong fundamentals and have capability to bounce back as and when economy improves,” Atish Matlawala, Sr Analyst, SSJ Finance & Securities told Moneycontrol.
“We are bullish on these 4 companies and believe that a recent correction is an opportunity to invest. Investors should look at valuations, corporate governance and future outlook for the company before investing,” he said.
The Indian equity market has lately been a victim of the global sell-off due to coronavirus. The market is likely to remain volatile for some more time, punishing the stocks with poor fundamentals.
“There are clear signs of weakness in real estate stocks which continued to report de-growth in net profit on a consolidated basis, and it is advisable on investors part to reduce allocation/position those two stocks. The macro factors also affected companies like Graphite India due to surge in raw material cost for an extended period, while Hindustan Copper is likely to get impacted from the global slowdown in demand,” Dinesh Rohira - Founder, CEO - 5nance.com told Moneycontrol.
“Further, it is prudent to exit or decrease exposure in public sector banks which are struggling with weak asset quality coupled with a sudden surge in provisions. There are also stocks like Reliance Power which is struggling with higher leverage and business issues in Wockhardt which reported a negative profit in a different periods,” he said.
What are the rules which one should follow?
Quarterly results are an important event for the company and its shareholders where they can get to see where the money is getting deployed, and if the business is generating enough cash to sustain the investment activity.
The growth prospect is one of the important parameters while evaluating an investment, but one-quarter of de-growth should not be a big cause of concern unless it is expected to persist for an extended period of time, suggest experts.
Since net-profit is inclusive of non-cash expenditure like depreciation or one-time expenditure/losses that reduces the earnings and technically indicate a loss in a statement.
“One of the important rules in valuing the financial performance of a company is to check the cash flow statement of the company which tells you how efficiently the company is running which also takes non-cash expenditure into account,” said Rohira of 5nance.com.
“The companies rich with cash are likely to sustain even during difficult period without taking a hit on the day-to-day business activity. Investors should also evaluate the financial metrics like ROCE within which the EBITDA margins and asset turnover ratio should be been more important to determine the efficiency of the management,” he said.
The companies which are highly leveraged should have very good reasons for the leverage position, and it should be avoided if the leverage is not backed by future growth prospects.
If you are planning to exit the stock based on one-quarter of data then analysts’ advise caution and review your decision after carefully looking at the balance sheet, cash flow statement, and other financial ratios of the company.
If we look at the data closely, only 14 out of 24 companies had posted loss of less than Rs 50 crore compared to the positive PAT in the previous quarters. To boost the economy, the government has taken many initiatives in the past two quarters, but one must give a certain time for implementation and it to show positive signs, suggest experts.
“One must look after the numbers in the financial statements including balance sheet, cash flows and key financial ratios of the company before deciding (either long or short),” Gaurav Garg, Head of Research at CapitalVia Global Research Limited- Investment Advisor told Moneycontrol.
“Indian market is in economic slowdown so the companies may pose a negative or de-growth for one or two quarters. But the investor must evaluate the companies based on the financial numbers and government initiatives to boost that sector like the government has taken initiatives to boost the infra sector which directly leads to the future growth of the core sectors,” he said.
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