Stock Fundamentals

Which companies saw a turnaround in Q3 earnings

Keerthi Sanagasetti | Updated on February 27, 2021

It would be wise to consider sustainability of earnings before jumping the gun

In the recent December quarter results, we saw a steep recovery in the earnings of India Inc-- a jump of 52.4 per cent y-o-y. Consequently, analyst and the investor communities have assigned significant re-rating to the earnings multiples of these companies.

The quarter also saw a surge in the turnaround cases. Of the constituents of the BSE 500 index, 30 companies reported profits, out of the 43 companies that saw net losses in the December 2019 quarter. For most DIY investors, this sure would deem an interesting entry point into these stocks.

The V-shaped recovery in the earnings of such companies should, however, be viewed in the light of sustainability. Not all the 30 companies mentioned above are ripe investment choices. For instance, the list of turnaround cases, includes banks such as Bank of Baroda, Punjab National Bank, UCO Bank, Indian Overseas Bank, and IDBI Bank—where the reported GNPA numbers exceed 9 per cent of their respective loan books. This was despite the slight moderation in the GNPA, in the December quarter, following the Supreme Court’s stay on the moratorium book. The earnings of banks were not just optically higher in the December quarter (on account of lower provisioning), but also face the risk of being dented severally in the upcoming quarters by likely slippages.

IDFC First Bank too reported a profit of ₹137 crore in the December 2020 quarter, compared to a net loss of ₹1,636 crore in the corresponding quarter last year. While the bank reported notable improvements in its operational metrics (such as net interest income), the sequential spike in proforma GNPAs could be a bummer – up 231 basis points to 4.18 per cent (as against the reported GNPAs of 1.33 per cent).

If you were also looking to invest in these turnaround stories, here we dissect a few prominent names, to decipher what led to the surge in earnings.

 

Volumes and realisations

A few turnaround cases were a result of rampant demand recovery. For a few others, the surge in demand also gave a fillip to realisations.

Steel players such as Tata Steel, SAIL and Jindal Steel all saw a turnaround in profits, with the increase in demand and consequent rise in prices. Other metal players, such as National Aluminum, too witnessed a recovery in earnings on the back of firm metal prices.

The Telecom (service) giant, Bharati Airtel, benefited from an increase in both market share and realisations (ARPU- average revenue per user), in both India and Africa segments. For instance, the net additions to Indian mobile subscriber base saw a near four-fold increase (y-o-y) in December quarter, the segment’s ARPUs inched up by 23 per cent (y-o-y). The consolidated net profits also saw a boost, post the recent hive-off of its Towers business. The company posted a net-profit of ₹1,175 crore against a net loss of ₹ 801 crore in the corresponding quarter last year.

Cost cuts

During the lockdown, with scarce revenues, many companies resorted to curtailing their costs. Cement manufacturers, especially, pruned their fixed costs significantly. Besides, these companies also benefited from a drop in the prices of fuel and power (coal); and extended buoyancy in cement prices that remained for a large part of FY21. India Cements and Orient Cements that suffered due to the headwinds in Southern markets saw a turnaround in earnings in the December 2020 quarter.

However, the quarters ahead are likely to see moderation in these cost savings. While not much head room is likely left in the fixed costs front, cement manufacturers may also have to bear the brunt of increase in diesel prices.

Lupin is another company that benefited with continuing cost control measures, in the December quarter—a net profit of ₹438 crore compared to a net loss of ₹835 crore in the corresponding quarter last year. While the company has already seen its operating margins expand by more than 7 percentage points (to 18.7 per cent in the third quarter of FY21), on account of lower R&D spends, more gains in earnings are likely in the coming quarters, given the product launches in the pipeline (predominantly in the US markets). Further its exit from its Japan subsidiary in the December 2019 quarter, also helped the company par debt on a yoy basis, now—interest costs for the company in December 2020 were down by 65 per cent (y-o-y).

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Published on February 27, 2021
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