A significant rise in net profit reported by companies is a positive indicator for future performance of stocks if they can sustain the positive results. But, the results could also be misleading, warn experts
March quarter results from India Inc. were fairly mixed but largely on the positive side. Airlines, NBFC and pharma companies saw the highest earnings growth YoY while metals, auto and auto ancillaries reported the biggest fall in growth.
Utilities, telecom, airlines and financials witnessed margin expansion while metals, auto, and pharma saw compression in their margins.
The beats-to-misses (BTM) ratio at 0.91x was lower sequentially (1.40x in Q3FY19). Among the major sectors, consumer and auto had the lowest BTM this quarter while industrials, IT, NBFC and private banks faring better with more beats than misses, JM Financial said in a report.
At end of FY19, the Nifty PAT has grown 9 percent YoY for the full year. The estimated PAT growth over FY19-21 is 20 percent led by the financials. The ex-financials PAT growth stands at 13.7 percent.
But, there are 199 BSE companies that more than doubled their March quarter profit YoY. Companies like UltraTech Cement, Cipla, Bharti Airtel, InterGlobe Aviation, Federal Bank, Bharat Forge and L&T Finance Holdings reported more than 100 percent growth in their consolidated PAT.
“If the profit has doubled due to strong revenue growth and improved operational performance one can consider the stock for investing,” Jayant Manglik, President, Retail Distribution, Religare Broking Ltd told Moneycontrol.
“Some of the quality names that can be considered for investing would be stocks like UltraTech cement, Godrej Agrovet, Federal Bank, Godrej Properties, P&G Healthcare, L&T Finance holdings and Varun Beverages,” he said.
A significant rise in net profit reported by companies is a positive indicator for future performance of stocks if they can sustain the positive results. But, the results could also be misleading, warn experts.
“Blindly trusting the results of a single quarter can lead to faulty investment ideas. As there can be one-off events that will not let the run-rate sustain. The list contains a majority of cyclical players belonging to the cement and realty space that posted exceptional returns this quarter mainly because of the effect of operating leverage,” Umesh Mehta, Head of Research, SAMCO Securities told Moneycontrol.
“Hence, considering these stocks only on the basis of over 100 percent growth this quarter is a faulty approach and investors must look at other quality factors as well,” he said. Mehta recommends investors to look at sustainability, visibility and scalability before investing in these stocks rather than only looking at one-offs in the quarter.
Consistency for a few quarters will give more confidence in the operational efficiency of a company and then investors must pick out these quality players for the longer horizon, suggest experts.
“Before putting money in these stocks, investors must analyse the results and contribution of other incomes in net profit as well as figures of past quarters and the general outlook for the sector,” Romesh Tiwari, Head of Research, CapitalAim told Moneycontrol.
“A significant growth in profits may reverse in the next quarter as we have seen in the past so it must not be the sole reason for making an investment decision. PE ratio, Debt-Equity ratio, order book and sector outlook must be thoroughly studied before making an investment decision,” he said.
Companies in which promoters have increased their stake and debt has reduced in recent quarters can be worth investing for long term; for example, DLF, Godrej Agrovet and Strides Pharma, advises Tiwari.
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