10 BSE cos double net profit in Q3; other factors to consider before investing in their stocks

In terms of price performance, nine out of 10 stocks have given negative returns up to 50 percent in last 1 year

The December quarter results were largely in-line with estimates with Nifty50 net sales, EBITDA, and PAT growing 19 percent, 2.3 percent, and 1 percent, year-on-year (YoY), respectively.

We have collated a list of 10 stocks from BSE that showed tremendous improvement in the bottomline quarter-on-quarter (QoQ) as well as YoY. The list includes ACCAxis BankBEMLBharat DynamicsGujarat GasInox LeisureShoppers Stop and Sundaram Clayton.

However, an important question is — if these stocks are a preferred buy at current levels? Experts feel that tracking the bottomline is one way to analyse the stocks and there could be numerous reasons for the rise in the net profit figure.

“Broad categorisation of the results as great will be myopic. It needs to be seen case-by-case on an adjusted basis as the presence of one-offs either in base or current quarter can result in inflated/deflated optical growth,” Pankaj Pandey, HoR, ICICIdirect.com told Moneycontrol.

Table: Profit numbers comparison QoQ & YoY with returns

“For example, Tata Communications’ numbers had on-off elements both in revenues and EBITDA, which resulted in superior reported numbers, adjusted numbers were merely decent. Similarly, Shoppers Stop numbers were also aided by a one-off element in the base quarter, resulting in higher reported earnings growth,” he said.

Pandey further added that there were few companies that had organic strong numbers, for example, Inox Leisure as it was aided by strong footfalls during the quarter or Gujarat Gas, which had strong underlying performance.

In terms of price performance, nine out of 10 stocks that have recorded doubling of growth in their bottom line on-year as well as QoQ, have given negative returns up to 50 percent.

Out of the nine stocks, Sundaram Clayton fell 52 percent in the last 1 year, followed by over 40 percent fall seen in BEML and Bharat Dynamics. Axis Bank is the only gainer that rose over 20 percent in the same period.

“Recent earning improvement will surely help re-rating in the stocks of selected names where profit growth is not due to one-offs but will continue in a structural sense,” Shailendra Kumar, Chief Investment Officer, Narnolia Financial Advisors told Moneycontrol.

“Stocks like Axis Bank, Bharat Dynamics, Inox Leisure, and Shoppers Stop have been the star of December quarter results. Domestic cyclical space has performed very well during Q3 FY19 result,” he said.

Corporate lenders like Axis Bank, ICICI Bank, and State Bank of India are set to do well in coming quarters as well. For these banks, the difference between the stressed asset and GNPA has narrowed and at the same time, NNPA as a percentage of loan is exhibiting downtrend. Also, the provisioning coverage ratio has considerably improved, which is positive.

Track other parameters before investing:

Looking at the net profit figure is one way of shortlisting stocks that are displaying strong growth. But investors should also keep an eye on free cash flows, return on capital employed, additional capex being deployed if any which could support growth, as well as management commentary.

Pandey of ICICIdirect.com said emphasis should always be on buying a business that is run in a capital efficient way and has a larger opportunity pie to cater.“Therefore, parameters such as ROCE profile, balance sheet (current leverage comfort as well as deleveraging plans ), improving margins profile, improving capacity utilisations apart from overall industry opportunity should be seen while analysing stocks,” he concludes.

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