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Five things to watch out for in Quarterly Results
It is the earnings season. That time of the year when companies begin to announce quarterly profit and sales performance data. Analysts have already put out estimates and expectations from companies they track. As an investor, you need to keep an eye on the profitability and revenue growth of companies that you invest in.
Here are five things you would hear most during this earnings season:
Profit growth: The net profit of companies is compared to the net profit reported in the quarter to December 2011 as well as the quarter to September 2012. The percentage change in the number gives the profit growth. A survey of analyst reports on profit expectations indicates that the 30 companies that form the BSE Sensex could report a net profit growth of around 11 per cent over December 2011 quarter. This is much better than around 6.8 per cent growth reported in the September 2012 quarter. However, most analysts expect companies in the BSE 500 index to show a slowdown in the profit growth.
Operating profit The difference between total income and total expenditure is the operating profit. If this number rises, companies are spending less. If this number falls, it means companies are finding it difficult to generate higher revenue. An operating profit of a company is an important metric for manufacturing or IT services companies. It is also called earnings before interest, taxation, depreciation and amortization or EBITDA. This value (EBITDA) as a percentage of sales gives an operating profit margin of a company. This is an indicator of how efficiently companies are generating the revenue. Software services companies like Infosys, TCS, Wipro are expected to see a squeeze in their operating profit margins. According to Kotak Securities estimates of companies they cover, operating profit margin for companies is likely to fall to 10.6 per cent in quarter to December 2012 against 15.2 per cent in the year ago period. This means companies are set to see a significant profit squeeze during the quarter.
Guidance: The earnings season typically kicks off with technology companies like Infosys announcing results. The financial statements are filed with stock exchanges and published in newspapers. They are prepared according to Indian accounting standards as well as according to International Financial Reporting Standards or IFRS. The important aspect of results announcement is the guidance company managements give to investors. Infosys, a large software services company, typically comments on profit and revenue guidance for the full year. It also discusses in detail factors that influence the guidance. Manufacturing companies generally do not follow the practice of guidance.
Management commentary: Television channels, newspapers or online websites interview company executives for a review of the quarter gone by. It is important to tune into interactions of companies that you are invested in. The strategic thinking of the management has a bearing on the future growth of a company. Companies like Infosys, TCS, Wipro, HCL Tech, ICICI Bank, HDFC Bank, Godrej Consumer typically have elaborate conversations with the media. Most companies schedule an earnings call with analysts at stock broking companies. You may have to rely on post-earnings call analysis by your stock broker for a detailed understanding of the company you are interested in.
The energy sector is expected to be the weakest performer in December 2012 quarter in terms of profitability. The government-owned oil marketing companies like Indian Oil, BPCL, HPCL are expected to witness a sharp decline in profits. The total under-recovery of subsidies for December 2012 quarter is estimated at Rs 23,300 crore, according to Kotak Securities estimates. This is the difference between the market price and administered price of diesel, kerosene and gas. The government is expected to pay these companies from the annual budget.