Thirty-six BSE500 companies more than doubled their net profit quarter-on-quarter in Q1FY20.
This outperformance comes at a time when the economy is slowing and most of the companies have performed below expectations.
These outperformers include Adani Enterprises, Chennai Petro, Gujarat Gas, IDFC First Bank, IndusInd Bank, InterGlobe Aviation, Jaiprakash Associates, SpiceJet and State Bank of India, among others
However, the question is if stocks of these companies are buys because some of them turned black after reporting losses in the previous quarter.
Many experts opine that most of these companies can’t be categorised as a buy even though they might have more than doubled their net profit sequentially as there could be multiple factors which could have resulted in a rise in net profit.
“Not all companies that have doubled their profits sequentially are strong companies and there are multiple factors which affect the price movement of a stock. In the aviation space, Interglobe Aviation and SpiceJet have mainly benefited due to shutting down of Jet Airways,” Umesh Mehta, Head of Research, SAMCO Securities told Moneycontrol.
“Similarly, there can be other macro factors which have led to the rise in these 36 stocks. At current levels and seeing the slowdown in the economy, getting into these stocks only on the price movement basis can prove to be a trap,” he said.
Table: Profit growth of above-mentioned 36 companies in the last three quarters.
“The companies like UltraTech, Adani Enterprises, Gujarat Gas, etc. have reported double PAT without any exceptional items and hence augur a good buy in the current correction. As we are undergoing slowdown in many sectors for last two quarters, and during a slowdown period these companies have managed to report such good earnings. It gives confidence that they will definitely report a better set of earnings during good times,” she added.
Will September quarter turn tables for India Inc.?
After a muted June quarter it is highly unlikely that the September quarter will make things turn around for India Inc. Although the government unveiled various measure to boost demand and increase consumption that could lead to a recovery in FY20-FY21.
September quarter looks gloomy as the slowdown has intensified in many sectors coupled with negative consumer sentiments. With some of the states witnessing flood, it could weigh on earnings of construction, realty, infra and consumer companies.
“There have been no positive signs of revival in the past two quarters especially in consumption-driven sectors like FMCG, consumer durables and auto,” Ajit Mishra, Vice President Research, Religare Broking told Moneycontrol.
“In the BFSI space, the credit growth is expected to remain muted given weak demand scenario and lack of private capex. However, given the recent depreciation in rupee, the IT sector could post a healthy set of results. In short, the overall general sense for Q2F20 results is expected to be below par,” he added.
Mehta of Samco Securities is of the view that there are a lot of issues at the grass-root level and the liquidity squeeze is affecting many other sectors along with the NBFCs. “The September quarter will not be any better than the June quarter for a majority of companies across sectors,” he said.
Factors to consider before buying a stock
Filtering stocks based on growth in net profit is one good filter but with an increasing number of defaults, leverage should be part of your checklist along with management pedigree, companies with an economic moat, promoter pledge, fund flow, and margin picture.
“Strong growth in bottom-line is definitely a good sign, but an investor needs to watch the factors which have boosted the company's profitability. It might be possible that growth would have reflected due to the lower base effect,” Sanjeev Jain, VP Equity Research, Sunness Capital India, told Moneycontrol.
“Along with bottom-line growth, topline and operating profit growth figures also need to closely watch, which will give a clear picture of actual growth. Also, Investors must focus on the company's management quality, corporate governance, balance sheet leverage position, etc. before taking the investment decision,” he said.
Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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