The markets are becoming much more discriminating. Unlike during the bull market frenzy between last October and January, when investors could make money blindly, or during February-March when panic gripped the entire market, investors are now separating the men from the boys.
The quarterly corporate results have become a trigger. Companies that miss estimates are being punished heavily, while those who top them are being rewarded. Take the case of Bharti Airtel Ltd, which reported strong revenue growth on the back of a jump in subscriber base and more importantly an increase in minutes of usage by its customers. The company’s stock rose 9.4% after the results were announced.
On the other hand, Tata Consultancy Services Ltd disappointed the market, reporting a drop in net profit as volume growth slowed and pricing fell. Its shares are down by more than 8% since the results were announced, even after accounting for gains owing to the extension of a tax holiday for software companies.
While a number of stocks have recovered handsomely from their recent lows, uncertainty is still high and investors are putting a premium on companies that are delivering strong profit growth or where the likelihood of meeting estimates is relatively high.
According to a fund manager, there are no broad trends in the market and any movement is stock specific, which makes the March quarter results very important.
Some analysts feel that analysts’ consensus earnings estimates for a large number of companies are aggressive and are fraught with risks.
The provisional results of Bharat Heavy Electricals Ltd confirmed the execution risk inherent in some capital goods and engineering companies. With the economy expected to slowdown and inflation at record highs, a number of analysts’ assumptions could go awry and earnings estimates may have to be lowered.
Thankfully, March quarter results aren’t yet leading to significant downgrades. Thus far, 58 companies from the National Stock’s Exchange’s CNX 100 index have reported results. The majority (31) seemed to be in line with estimates, going by their sedate share price movement since their respective results were announced.
Only eight companies seemed to have disappointed, based on the fall of 5% or more in their share prices. Among the biggest losers were Siemens Ltd, which saw a drop in profit owing to provisions for losses due to to poor sub-contracting work and because of an increase in input costs. Other big losers included Zee Entertainment Enterprises Ltd, as new channel launches eroded its margins, ACC Ltd and Grasim Industries Ltd because of bleaker prospects of the cement business.
The balance, about a third of this sample set, reported better-than-expected results. The biggest gainers were HCL Technolgies Ltd, Infosys Technologies Ltd, LIC Housing Finance Ltd, Axis Bank Ltd and Hero Honda Motors Ltd. Although the number of gainers are much more than stocks that have lost since reporting results, it’s important to note that only a select few such as Hero Honda may see material earnings upgrades after the company’s pleasant surprise on margin expansion.
The banking sector too has shown a sharp variation in results, with a handful or private sector banks doing well, but with most state-owned banks seeing a squeeze in net interest income.
In short, it’s going to be a differentiated market from now on, with the ability of companies to tackle the economic headwinds being the criterion for stock performance.
India: valuation premium expands in April
With the stock market bouncing back nicely, how does the Indian market now compare with others on valuations?
In terms of the S&P/Citigroup Global Equity Indices, the one-year forward price-earnings multiple on the basis of consensus earnings estimates computed by the Institutional Brokers’ Estimate System or IBES (an internationally recognized guide to consensus earnings forecasts) for the Indian market moved up to 20.93 on 30 April, compared with 18.53 at the end of March. That’s a 13% gain in valuation in one month.
Other markets too bounced back in April, but not so much as the Indian market. For example, the MSCI Barra index for India went up by 11.04% in April, compared with 4.9% for the World index and 7.87% for the Emerging Markets index. The MSCI US index went up 4.83% during the month.
Some markets improved even more than the Indian market—China was up 15.36%, while MSCI Brazil was up 14.78% in April. Surprisingly, however, while the valuation for the Indian market expanded by 13% over the month, that for China remained the same while the forward P-E multiple for Brazil expanded by 9%. Possibly, downward revisions of Indian earnings may have contributed to the expansion in valuations.
That means not only does India remain one of the most expensive markets, but its valuation premium to others has expanded over the month. That’s not a good sign for followers of value.
Ashwin Ramarathinam contributed to this column