Earnings season is here and it’s time to get down to business as while the markets may have gone up, the true fundamentals of the markets lie in its earnings. Yes, the markets may have decoupled from the economy, but it cannot de-couple from earnings in the long run and therefore in this article we enlist the key factors to analyse during an earnings season. These below factors remain a constant while analysing any quarters result but there could be certain factors which could hold more importance in a particular quarter. Therefore, we have put a small summary for factors specifically for Q2FY21 earnings season. Let’s look at the constant first.
Profit growth should not be the only thing to look at
Most of us often look at the company’s profit growth while analyzing the quarterly results. However, it is important to note that profits may optically look higher despite flat or weak growth in sales. This could be due to one-off income, change in accounting principles, and tax reversals in the current quarter. Further, the growth could also look higher if any of the above factors are reversed in the base quarter. Therefore, it is important to take a holistic approach while analyzing the results.
A holistic approach to analyse Profit & Loss statement
This means analyzing four key parameters like Sales, EBITDA/Operating Profit, PBT and Net Profit. Ideally, business growth (sales) should translate into higher profits implying that the company has managed to grow profitably. However, it is even better if the profit growth exceeds business growth. This should be led by a sustainable approach and should not be due to any one-off factors as mentioned above.
Some factors of a sustainable approach include improved operating performance meaning that the company has managed to control cost. And/or repayment of debt leading to lower interest cost. Coming to tax, the effective tax rate of companies normally doesn’t change much unless there is a change in corporate tax rates or some new tax benefits which the company plans to avail or vice versa. These parameters work across sectors except for BFSI wherein the parameters are different.
Banking sector parameters are different
For BFSI space the set of parameters are different due to its nature of business. The important parameters to consider for Banking and NBFC companies would be to analyze its Net Interest Income, Non-Interest Income, Total Income, Operating Profit (Pre-provisioning profit) and Provisions (Lower the better) and Net Profit. Further, apart from this one must also look at loan growth numbers and asset quality ratios like Gross NPA and Net NPA ratios (Lower the better).
Market Expectations plays a very important role
Post carefully analyzing the above parameters for the targeted company, it is important to understand what the market expectations are for the result? One must have noticed that when the company is due to announce its results, it usually sees higher volumes (could be an up move or a decline) at least a week prior (could be more or less in certain cases) implying that the general consensus is factoring in a good or bad result. One can look for general consensus expectations with their respective brokerage research reports on the company or even Moneycontrol provides the same (at least for large-cap companies).
Numbers speak a lot; however other factors matter too!
Apart from the numbers, there are certainly other factors that one should analyze. These include press release (which gives business outlook or key highlights of the quarter). Further, the management holds an investor/analyst con-call or press conference or both, post the result is announced, that helps in analyzing future growth or any key developments of the company. One can find the con-call details on BSE or can contact the Investor Relation of the company for call details.
Factors to watch out for in Q2FY21 earnings season
Coming specifically to Q2FY21 results, most companies, especially in the consumption space, are likely to report healthy growth sequentially as easing restrictions has led to considerable improvement in demand. However, the higher focus would be on how companies have managed to tackle cost pressures, supply-side issues and lower operating leverage.
The markets have run up anticipating the recovery in demand going ahead and therefore more than the earnings announcement the outlook given by the management of big players (in Nifty 50 or) in the specific industry would hold extreme importance. Moreover, we are heading into the festive season. Further, since it’s Q2FY21 analysing the half-yearly balance sheet would also be important. One can read on How to analyse the balance sheet of a company here?