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Q3 results - 4 things to know
‘Corporate earnings’ is a key indicator used by investors to understand the performance of a company. Over the past few days, a lot of companies have announced their earnings reports for the third quarter of FY2018. In this post, let’s analyse how companies have performed during the December quarter.
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Rise in net profits:
A large number of companies have shown positive earnings for the third quarter of 2018 on a sequential basis. In a report by Care Ratings Ltd, a sample of 1,572 companies was taken to analyse the growth in net profits. In Q3 of 2018, these companies registered a 13.6% growth in net profits. This is much higher than the growth rate of 9.5% registered in Q2 of 2018.
However, on a year-on-year basis, the results were a bit subdued. Compared to the performance this year, net profits had registered a slightly higher growth of 13.8% during the same time last year. Similarly, growth of net sales was lower at 9.7% in Q3 of 2018 compared to a growth of 19% for the same sample of companies in Q3 of 2017.
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Expectations of recovery in growth:
With returns matching or even exceeding analysts’ expectations, questions have resurfaced regarding the earnings outlook. There have been several quarters of downward revisions in corporate earnings recently. The positive report card for Q3 indicates a reversal in this trend. The earnings estimates for Nifty-50 and BSE-30 indices were revised upwards by Kotak Institutional Equities.
At the same time, it is important to note that valuations in the market are quite high despite lower earnings growth. In addition, the quality of growth is also quite poor. For instance, in the Nifty 50 index, 60% of the incremental profits for FY2019 come from sectors such as Public Sector Banks (PSUs), metals and mining, utilities and oil and gas. However, these sectors should be trading at lower multiples.
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Sector wise analysis:
The great performance in Q3 was driven strongly by consumer-centric businesses. Out of a sample of 491 companies, sectors such as automobiles, Fast Moving Consumer Goods (FMCG), media and entertainment and hospitality reported a 23% growth in net profits on a YoY basis[1] according to a report by the Economic Times. This growth rebound came after a 14.9% drop in net profits in the previous year. The growth was the strongest in as many as five quarters.
On the other hand, the pharmaceutical sector registered a marginal slowdown during the quarter. In the telecom sector, price wars among competitors led to a decline in sales during the quarter.
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Optimism for the future
Currently, there are positive signs when it comes to net profits. But when it comes to net sales, it may still take some time for the different industries to get back on track. That said, the earnings reports for the third quarter hint at a revival in growth and demand in the upcoming quarters.
In the immediate aftermath of the demonetisation move, net profits grew at 1.7% in Q4 of 2017. With such a low base in the previous year, the Care Ratings report suggests that the March 2018 quarter can be expected to clock good results.
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$822.50 million
Shares worth $822.50 million were bought by foreign institutional investors so far during this year according to a report by Livemint. In addition, domestic investors have pumped in as much as Rs 748.02 crore. This is a positive sign especially since the Q3 earnings hint at a potential growth revival in the Indian markets.
