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4 things to know ahead of earnings season
Companies are expected to start announcing details of their financial performance for the quarter to March 2015. Markets typically react to these earnings announcements.
Around this time, analysts also post earnings expectations for companies listed in the stock market. These reports act as a benchmark to compare the companies' performance against. Stocks usually rise if companies beat these expectations.
Here are four things to know:
No profit growth expected
The Sensex companies are together expected to post a profit growth of 0.1%, according to a Kotak Securities report. That means the companies could have witnessed no rise in their profits in the quarter in comparison with March 2014 or the year ago period. This, however, is better than the December quarter growth. That said, if you remove the energy stocks - which often see some of the biggest profits - the Sensex companies' performance is worse. Profits for non-energy companies could decline 1.8%.
Poor demand scenario
Profit is tied with the company's revenue from sales. If the company does not sell enough, profit will see limited growth. This is the case in the March quarter too. Revenues for the Sensex companies are expected to grow 0.2% in the quarter on a year-on-year basis. This shows the poor demand scenario in the country. However, with inflation tamed down, demand could pick up in the future. Experts suggest it would take two more quarters until the effect of the economic recovery is seen in corporate data.
Some sectors may outperform the Sensex average. Telecom is likely to be the best performing sector, with a 25% growth in profits. Banking, FMCG and pharma sectors too could see profit grow 12-18% each. The worst affected sectors would be industrials and metals & mining, according to the analysis. To add to that, the March quarter usually turns out to be a weak quarter for IT services companies. This is when companies in the US - which follow the January-December calendar year - start their planning for the entire fiscal year. As a result, IT companies find it difficult to get new projects started. This leads to poor sales and profits.
The situation may seem grim, but there are silver linings to the story. While net profits and sales (bottomline and topline) are expected to show no growth, operating profits may improve. Earnings Before Interest, Taxation, Depreciation and Amortisation (EBITDA) margins - which measures the company's profit-making ability - is likely to improve marginally in the quarter to 18% from 17.5% in the October-December quarter. This means companies are pocketing a larger portion of the revenues as profits as costs fall. This rise in profit margins shows that companies are benefiting from the fall in input prices.
Earnings per share or EPS is an important metric. It measures how much profit a company makes for every share issued. This EPS is then compared with the stock price to find out if you are shelling out more rupees for a share than it is worth. The Sensex EPS is expected to touch Rs 1,624 in FY16. This means the Sensex - at 28,750 levels - is trading at over 17 times the FY16 earnings. The earnings per share is expected to rise to Rs 1,934 in fiscal year ending March 2017.