Do it yourself

The latest earnings season (2QFY23) ended, leaving the markets with “glass half full or glass empty” feelings. The aggregate results were mostly in line with the already moderated expectations; though granular details indicate a wide divergence within sectors. Overall, the management commentary sounded optimistic about easing raw material, logistic and wage cost pressures; though the companies did not sound particularly sanguine about the demand environment, especially the rural demand and export demand. The earnings for 2QFY23 were also mostly driven by financials; while IT, FMCG and Pharma also put up a good show. Oil & Gas, capital goods, consumer durables, telecom, automobiles and cement were notable underperformers. Post the results, FY23 Nifty EPS estimates have seen marginal changes, while FY24e earnings estimates have been moderated further. The long term (5yr CAGR) earnings trajectory is now flatte...

As I suggested yesterday ( see A perfect storm ), “the best strategy under the present circumstances would be to (a) hold nerves and not panic; (b) review the portfolio for any corrective action that may be needed once the storm passes and the sea becomes calmer.” To add further to that, I may suggest that the following points may be pertinent to note while reviewing the portfolios: 1.    The higher cost of capital (interest rates) would result in lower fair valuation for equities in general. The growth companies that have debt on balance sheet or need to borrow for capex; and/or where the free cash flows are mostly back ended may see much sharper cut in their target multiples. In fact we have already seen 20% derating in Nifty PE Ratio over the past eight months. 2.    The market consensus was working around 18% CAGR for Nifty earnings over FY23-FY24. The realized earnings growth may be much lower than this. My personal assessment is that we may end ...

  The latest result season (3QFY22) has ended on a mixed note. While aggregate numbers look on expected lines, the internals however show a different picture. There is significant divergence in performance of various sectors. In fact, the number of companies that did not meet market expectations is higher than the number of companies beating the expectations. Raw material inflation hurt most of the manufacturing sectors. Lack of pricing power in view of poor demand thus resulted in margin compression for most of the manufacturing sector. Financial sector was the brightest spot with credit demand accelerating, and asset quality, recoveries & profit margins improving. IT Services and Real Estate were other sectors that witnessed better performance on better demand environment. Metals and mining had another great quarter as prices remained elevated, with non-ferrous performing better than the ferrous metals. Oil & Gas sector performance however was below expectation. Though th...

  Wishing all readers on the auspicious occasion of Lohri, Makar Sankranti, Maghi, Poush Sankranti, Pongal, Surya Uttarayan, Bhogi, Tusu, Bihu, Pedda Panduga and much more.   May this auspicious transition of Sun God may empower the universe with divine energy and light and protect humanity from all demonic forces. Happy Earning Season Technically the quarterly result season starts from first day of every calendar quarter. However, the formal festivities begin with the IT Services major announcing their quarterly performance 10-13 days later. This season, perhaps for the first time in history, the top three IT service players chose to kick start the festivities together on 12 th January. Obviously it was an auspicious start to what is popularly anticipated to be an extremely fruitful earnings season. Near consensus on corporate performance There is near consensus on corporate performance during 3QFY22 in particular and FY22 as a whole in general. Post 2QFY22 a major...

The stock price of few top IT services companies in the country recently corrected sharply after declaration of 4QFY21 results. The explanation commonly offered and widely accepted for the fall in stock prices was that “the results were not as per the street expectations”. I find this little intriguing, especially in the current market environment. It is well acknowledged that in recent times, the non-institutional investors (“retail investors” in common parlance) have been the dominant players in equity markets world over. In my past 30years of interacting frequently with this category of investors in India, I know that a large majority of these non-institutional investors are not well versed with financial analysis, especially related to the forecasting of financial performance and deriving fair price based on such forecasts. Moreover, there is an insignificant minority in this category of investors which actually relies on the target prices forecasted for a security by “fundamen...

In the context of India stock markets, I found the following two things worth noting on Tuesday: (i)     A number of brokerages wrote strategy notes urging the clients to use the recent “lockdown fear” led correction in stock prices as a good opportunity to buy stocks. Apparently, the strategy appeared to be driven by (a) deep fall followed by a sharp recovery in 2020; and (b) belief that the abundant global and local liquidity and low interest artes will continue to support equity markets for couple of more years at least. (ii)    The IT sector stocks corrected rather sharply after the bellwether TCS announced a decent set of number for 4QFY21 and encouraging commentary for FY22. This highlights, in my view, that markets expectations may be running rather high in terms of corporate performance and payouts. There is virtually no margin for any disappointment on earnings or payout front. Some research reports have taken note of the intensifying second wave ...

The latest earning season (3QFY21) has been one of the best in recent times. Companies across sectors reported encouraging revenue growth. The margins also improved on the back of lower input cost and wage rationalization. Accumulated demand (due to two quarters of lockdown) and festive season may have a significant role to play in the demand growth during 3QFY21. It is anticipated that as the economy continues to open up further as vaccination drive accelerates and mobility restrictions are eased further, the demand growth may sustain for few more quarters. The demand environment is also supported by the counter cyclical fiscal policy and continued accommodative stance of monetary policy. The quarterly earnings surprised many analysts on both EBIDTA and PAT level; while on top line the surprises were lesser in number. For Nifty companies, on aggregate basis, EBIDTA margins and PAT margins were flat. However, after adjusting for exceptional losses in Bharti Airtel and Tata Motors, pict...

The latest earnings season has started on a very buoyant note, led by some IT companies. In line with the high speed macro indicators, most brokerages have upgraded their earnings estimates in past one month. The present estimates are building in a very strong earnings recovery over FY22-FY23. The estimates for the current year FY21 have also been upgraded sharply from a contraction of 5% to 12% to a growth of 5% to 12%. Currently, the market is estimating an earnings growth of 24% to 38% in FY22 and another 18% to 22% growth in FY23. It is important to note that these estimates assume GDP growth of -7% to -7.5% in FY21; 9% to10% in FY22 and 4 to 5.5% in FY23; interest rate bottoming in FY21 and elevated inflation of 5 to 6% over FY22 and FY23. This implies less than 3% CAGR of GDP over three year period of FY20-FY23. Whereas, the present estimates imply ~19% CAGR in Nifty EPS over FY20-FY23. Apparently, there is disconnect between the macro forecast and earnings forecast. In past ...

The year 2020 has been a period of extremes for markets. During past 12months, the equity markets have kept swinging between extreme fear and greed. The year began on a buoyant note. The benchmark indices scaled their all-time high levels on 24 January, after rallying for past 4 months. In the following 2 months the indices corrected ~40% from their January highs, refreshing the fading memories of 2008 crash. A sustained rally thereafter saw the benchmark indices scaling new highs in next 9 months. This rally was remarkably different from September 2019-January 2020 rally in terms of volumes, market breadth, and participation. Foreign investors and domestic household investor have been notable buyers in 2020 rally, while the domestic institutions have been net sellers. In my view the top 10 highlights of the performance of Indian equities in 2020 were as follows: 1.    Though benchmark indices indicate that mid and small cap indices have done materially better than th...

FY20 is the worst financial year since FY09 in terms of year on year Nifty returns. Nifty lost ~25% of its value during the year. Most of these losses have come in past one quarter (Q4FY20), during which Nifty lost close to 30% of its value. In my view, considering the present circumstances and indications visible presently, the earnings and economic growth outlook remains heavily clouded for next 2-3 quarters. Thus, there are chances that the calendar year 2020 may turn out be a disappointing year in terms of equity returns. Working on various scenarios for the Nifty levels one year from now, I concluded that Nifty may return 5-8% in next 12months considering flat earnings growth in FY21 and 10-15% growth in FY22; and valuations close to long term average of 17%. I appreciate that 10-15% yoy earnings growth in FY22 appears quite challenging in the present conditions. However, considering the lower base (no growth for 3years) and economic recovery due to easy monetary policy ...