The Sensex and Nifty are scaling new record high levels every day in the stock market. The Price to Earnings ratio for the Sensex on a trailing twelve month earnings basis (TTM) is 20x and that for Nifty is 22.7x. Sensex and Nifty PE has risen from levels of around 15x seen a couple of years ago. The earnings growth has to keep pace with the rising valuations, otherwise the probability of a correction always increases with rising levels of the index. Many of the index stocks have already reported their earnings for the third quarter ended December 2014. It would be interesting to understand the trends in the financials of these blue-chip companies and whether they are in sync with the expected growth in the next few quarters. Although the growth trends have to be observed on a quarterly year on year basis, sequential growth turns out to be of significance especially in an improving macroeconomic scenario.
Quarter on Quarter Growth is Showing Weakness
Infosys began the earnings season for Q3FY15 followed by TCS and Wipro in the Information Technology space. The revenue guidance has been seen to be continuously revised downwards for bigwigs such as Infosys. The overall FY15 guidance of 7% to 9% growth given by the company seems to be highly optimistic on the higher side of 9% but is realistic on the lower side of 7%. The companies that used to command a higher double digit growth have now been witnessing a slowdown to higher single digit or lower double digit growth.
Infosys, TCS and Wipro have reported subdued growth in revenues and as such the IT sector slowdown is clearly visible in the quarterly results of the Financial Year 2014-15.
Infosys reported a revenue growth of 3% in Q3FY15 and 4% in Q2FY15. The EBIDTA margin has shown a marginal improvement from 25% in Q1FY15 to 27% in Q3FY15. The growth in EBITDA was observed to be 6% for Q3FY15 and 8% for Q2FY15.
TCS reported a revenue growth of 3% in Q3FY15 and 8% in Q2FY15. The EBIDTA margin has been stable at 29% from Q1FY15 to Q3FY15. The growth in EBITDA was observed to be 4% for Q3FY15 as compared to a growth of 7% for Q2FY15.
Wipro reported a revenue growth of 2% in Q3FY15 and 5% in Q2FY15. The EBIDTA margin has shown a marginal decline from 24% in Q1FY15 to 23% in Q3FY15. The growth in EBITDA was observed to be 6% for Q3FY15 as compared to a decline of 2% for Q2FY15.
Idea Cellular was the only company that reported earnings in the Telecom space in the month of January 2015. The revenues have grown 6% in Q3FY15 as compared to a flat growth in Q2FY15. The net profit margin (NPM) was reported at 8% in Q3FY15 compared to 9% in Q2FY15 which shows slight pressure on the margins. Net profit remained flat in Q3FY15 in comparison to a growth of 3% it showed in Q2FY15.
Reliance Industries reported a 17% decline in the revenues for Q3FY15 as compared to a flat growth in Q2FY15. The company has been able to maintain the net profit margin of 6% for all quarters from Q1 to Q3 in FY15. The net profit has however declined 11% in Q3FY15 compared to a growth of 2% in Q2FY15. Sharp fall in crude oil prices have led to a sharp fall in revenues and profitability for most of the oil producers in the World and Reliance Industries is no exception to the trend.
In the Automobile Sector Bajaj Auto Ltd. and Maruti Suzuki Ltd. have reported their earnings for Q3FY15. Ideally the third quarter of a financial year is very good in terms of revenue growth and profitability for Automobile companies because of the festive season. Let us see what the actual numbers indicate.
For Bajaj Auto Ltd. the Revenues declined 5% in Q3FY15 compared to a 14% growth that was seen in Q2FY15. The net profit margin was reported at 15% in Q3FY15 compared to 10% in Q2FY15.
Maruti Suzuki reported a 2% rise in revenues in Q3FY15 as compared to an 8% growth in Q2FY15. The net profit margin was reported at 6% in Q3FY15 compared to 7% in Q2FY15 which shows slight pressure on the margins due to additional costs incurred for new vehicle launches and promotion. Net profit declined 7% in comparison to the growth of 13% it showed in Q2FY15. Pressure on margins indicates intensifying competition in the Auto sector to garner market share with growth being achieved at the cost of declining margins for the companies.
ITC Ltd. reported 1% and 2% decline in revenues for Q3FY15 and Q2FY15 respectively. The company was able to show growth in profitability with net profit margin increasing from 24% in Q1FY15 to 29% in Q3FY15 coupled with 9% and 11% rise in the net profit for Q3 and Q2FY15 respectively. This kind of growth in profit is attributed to decline in cost of raw materials. Ideally revenue growth coupled with rise in profitability is considered healthy for any company.
Hindustan Unilever reported 2% growth in revenues in Q3FY15 as compared to a 1% decline in Q2FY15. The companies in the consumer goods sector tend to show a growth in revenues with rise in profitability in the third quarter of the financial year because of the festive season. Profit rose 27% in Q3FY15 as compared to a decline of 6% seen in Q2FY15.
Info Edge India Ltd. which hosts portals such as naukri.com has reported a decline in revenues by 1% in Q3FY15 as compared to a growth of 2% in Q2FY15. Profit has shown a growth of 16% in Q3FY15 as compared to a decline of 17% in Q2FY15. The company continues to invest heavily in the portals of 99acres.com which deals in the real estate business. The company was however able to maintain its net profit margins at a level of 27% in the last three quarters. Growth in profitability along with decline in revenues is not a sustainable trend for any company. Fundamentally, rise in revenues if accompanied by growth in profitability will rerate the stock to higher valuation levels.
The Sensex and the Nifty seem to have already factored in the earnings growth for the index companies even though many of them are yet to report their earnings for Q3FY15. The reason is that the Sensex and the Nifty have factored in the growth the companies could witness on the back of easy monetary policy and improved sentiments on India’s macros. However if revenue growth falters on lack of domestic and global demand, justifying high valuations would be difficult.
Table : Monthly Market Movement