Q4 2020 : Hits & Misses!
The period of Q4 2020 is considered by many as crucial because it can give us a glimpse of what lies ahead of us in the next quarter. However, this time around the last week of March, which is supposed to be the best week for business for many companies, was lost in lockdown, thus impacting the overall results. Yogesh Supekar analyses the Q4 results while Geeyatee Deshpande highlights the positive results and the ones that were below the estimates
Even as investors ponder about whether the sharp surge witnessed in the equity markets, which has pushed the Sensex almost 27 per cent higher from the lows it made on March 23, is a rally of the bears or the bulls, the Q4 2020 results are showing visible signs of damage in earnings for a lot of companies. This earnings’ season is just a precursor to the next earnings season where we can expect to see maximum damage caused due to the extended lockdowns. Meanwhile, one cannot waive off the possibility of the pandemic getting into a fresh phase and getting out of control, which may force the central and state governments to announce stricter measures.
And while the current rally could fizzle out easily and we may head lower towards the lows made on March 23, the bulls are hoping that even if the virus cases keep on increasing, the lockdown as seen in round one may not happen again. If it does, there is a chance that we may see a double dip in the markets. For Q4 2020 it was expected that the earnings would be dampened to some extent due to the unprecedented crisis. Before the virus made its presence felt it was expected that corporate India would be delivering on its growth promises in Q4 2020.
The emergence of the outbreak forced the strictest lockdown in India which led to loss of business in the last week of March. However, amidst all the volatility and fire-fighting going on around the globe there is some good news on the earnings’ front for the bulls. Several analysts have continued to cut Asian companies’ 2020 earnings over a few months now but the downgrades have been the smallest in the last one month. This minimal downgrade, according to analysts, is because most economies have reopened after lockdowns stretching into several months.
The opening up of economies has triggered optimism that the profits will boost recovery as the year passes. The stock prices have aptly reflected the same optimism. It has been observed that technology firms and utilities have posted the smallest downgrades while the energy and consumer discretionary sectors have witnessed some of the biggest downgrades in the past one month. It seems apparent then that investors are betting on profit recovery and not on economic recovery.
Q4 2020 Preview
Overall, the results have been a little disappointing and expectedly so. If we talk about the Sensex stocks, once again the positive results were primarily concentrated on banking and financials. In this sector, SBI, Bajaj Finance, ICICI Bank, IndusInd Bank and HDFC Bank were amongst those Sensex constituents that managed to display positive results. Bharti Airtel, HCL Technologies and Ultratech Cement are the other Sensex constituents whose performance was satisfactory on the earnings’ front. It is important to note that in Q4 2020 the private banks have managed to outperform their PSU counterparts. Only SBI and IDBI Bank from the set of PSU lenders managed to impress with their earnings this season.
Leading names such as Mahindra & Mahindra, RIL, Hindustan Unilever, Tech Mahindra, Maruti Suzuki and Axis Bank clearly disappointed investors in Q4 2020 as regards earnings’ growth.
What is interesting to note here is that stocks such as RIL and Mahindra & Mahindra have inched up due to strategic business decisions, leading to increased investor attention in the scrips. For RIL it has been the valuation of Jio which is keeping the stock in limelight while for Mahindra & Mahindra it is the strategic decision to shut down its loss-making subsidiaries that is keeping investors hooked to the scrip.
Performance of Mid-Caps and Small-Caps
The mid-caps have not been spared in the current onslaught.
However, what should bring some glad tidings to investors is the fact that the mid-caps are showing signs of outperformance with the BSE Midcap index down by nearly 17 per cent on YTD basis while the Sensex has been down by nearly 20 per cent in the same period. Even the BSE Smallcap index is showing relative strength and is down by nearly 13.5 per cent.
Several constituents of Nifty Midcap index have managed to impress with their performance in Q4 2020. Gujarat State Petronet, Alkem Laboratories, IDBI Bank, Jubilant Life, Torrent Pharmaceuticals, Coromandel International, Jindal Steel, IDFC First Bank, Ajanta Pharma, Larsen & Toubro Infotech, Tata Consumer, Mannapuram Finance, Syngene International, Mphasis, Godrej Properties, Godrej Agrovet, Varun Beverages, AU Small Finance Bank and Hexaware Technologies are the mid-cap stocks that managed to declare positive results and catch investors attention.
Here is a list of small-cap stocks where the net sales and net profits have grown on both QoQ and YoY basis:
Further, here is a list of mid-cap stocks where the net sales and net profits have grown on both QoQ and YoY basis:
From the constituents of Nifty Smallcap index we found EID Parry, Timken India, KEI Industries, Kaveri Seeds, MCX, Proctor & Gamble Health, RCF, Rain Industries, Ujjivan Financial Services, Deepak Nitrate, JK Laxmi Cement, Laurus Lab and TV18 Broadcast delivering positive set of numbers.
Sectoral Performance
While there are winners and losers in each sector, the finance sector has shown a good number of companies with quality set of numbers. ICICI Securities, ICICI Lombard, Chola Financial, Mannapuram Finance, 5 Paisa Capital, U Gro Capital, Startech Finance, Ujjivan Financial Services, MCX, PNB Gilts, Max Ventures & Industries and Geojit Financial Services are some of the outperformers in terms of earnings this season.
Even though the pharmaceutical sector has done well on the bourses, a matching performance in terms of earnings was missing. Most companies struggled to impress investors with their earnings. Aurobindo Pharmaceuticals and Laurus Lab stand out in the sector in terms of growth in sales as well as profitability. Pharmaceutical majors such as Sun Pharmaceuticals, Cipla and Dr. Reddy’s Lab failed to generate any excitement among investors with their earnings.
IT is another sector along with financials that has several companies with a good set of numbers. HCL Technologies, Hexaware Technology, Mphasis, Mastek, Majesco, Birla Soft, Nucleus Software, Larsen & Toubro Infotech and Subex have impressed investors with superior results this season. FMCG as a sector saw some outperformers with names such as Tata Consumer, Tasty Bite Eatables, ADF Foods and Godrej Agrovet doing well this earnings season.
Conclusion
It is estimated that the Indian economy will contract by 5 per cent. The contraction in economy is expected to lead India Inc. towards an approximate 15 per cent decline in revenue and about 25 per cent fall in earnings before interest, taxes, depreciation and amortisation (EBITDA). The fall in revenues is expected to be steeper for MSMEs. Such a situation presents a worrisome picture ahead of investors as for sure the earnings in the next quarter will take a royal dip. In such an environment where uncertainty is at its peak, it makes tremendous sense for investors to focus on those stocks which have proven to be consistent performers as indicated by their performance on QoQ as well as YoY basis. Those companies where sales have improved with rising profits and margins are to be focused on.
It is not difficult to predict that NBFCs and financials may underperform in the coming months along with banks even though the stocks from this sector have delivered better results. Almost 60 per cent of the loans for the NBFCs are touted to be under moratorium. Investors ought to be cagey about the sector. Even for the best of the best NBFCs the margins will be under pressure and a drop in growth is a given which may impact the stock prices negatively. The defensives may come up with a relatively better performance in terms of earnings and hence there is a chance that the defensives may outperform. As the lockdown eases, investors worldwide are expecting a recovery in profits while hoping that recovery in economy may follow in 2021.
Reports by global investment banks hint towards the global economy being in a new expansion cycle already. Economists predict the output in the economy to return to pre-corona virus levels by the fourth quarter, thus showing a lot of confidence in a V-shaped recovery. The current recession could be short-lived as the current crisis is not an endogenous shock caused by any huge imbalances. Also, the unprecedented crisis has forced the policy-makers to think out of the box and plan for the worst, which has resulted in solid policy support at least in the developed world. This support has not only been decisive but a sizeable one which is expected to boost recovery.
In such a scenario where the economy is expected to stage a V-shaped recovery, all investors have to do is invest money for the long term and construct a diversified portfolio of stocks where the consistency in earnings is exhibiting relative strength. Investors can analyse the prospects of all the stocks mentioned in this article which have beaten the estimates and the ones which have declared impressive results. It is always a good idea to study a company’s QoQ and YoY performance to understand where it is headed in terms of earnings.
Companies reflecting strong performance on a quarterly and yearly basis with rising profit margins are the ones that deserve further investment scrutiny. The reason why stocks fell was not due to the spread of the virus but because the economy was under lockdown. The biggest stimulus for the global economy and more so for the Indian economy right now is the opening of the economies. This will provide strength that no other policy decision and support can offer and hence the markets will factor the opening of the economy positively and at the same time may punish if the economies were not to open as smoothly as is expected right now. In short, investors will have to focus slightly more on economic activities picking up rather than the increasing number of cases!