Earnings Season Alert: Go For Quality Earnings, Shun The Laggards
Recently, the world’s two biggest economies, the US and China, had a dialogue on trade war issue. There are some signs of modest progress in this meet and China has promised to buy significant amount of US exports, which consists of agriculture, energy and manufactured goods. However, both parties did not give any details of the meeting. Besides, China’s central bank last Friday slashed the cash reserve ratio which banks must hold as reserves by 100 bps amid slowdown in the country’s economy triggered by trade war with the US.
Coming back home, Indian Inc. will start reporting its third quarter earnings of FY19 now onward. The key things that might play vital role in the companies’ financial performance are lower crude oil and commodities prices. Lower crude oil is likely to benefit many companies as their input costs might have lowered during the quarter. On the other hand, oil and marketing companies’ performance might face headwinds due to lower oil prices. The stable Indian rupee may give some cushion to IT and pharma companies as their major revenue comes from the US. Despite the third quarter being a quarter of many festivals, the overall sales numbers from this festival season were weaker than expected and may hit the performances of consumer goods companies. The NBFCs are facing liquidity crunch, yet the PSUs and private banks are likely to post good set of numbers.
The crude oil price, post implementation of production cut by OPEC and others major oil producers, has started its northward movement and surged to almost USD 61 for a barrel from USD 54 last Thursday. The Reserve Bank of India has warned that the unexpected rise in crude prices can dampen the country’s major macro-stability parameters, as sharp rise in crude prices could lead to increase in current account deficit, inflation and fiscal deficit, which could diminish the benefits of higher growth.
Going forward, the one thing that would be challenging for the government is managing unemployment, The Centre for Monitoring of Indian Economy (CMIE) has stated that unemployment for the month of December 2018 shot up to 7.38 per cent, which was not seen since last 27 months. Especially, major unemployment was seen in rural India which accounted for 83 per cent of the job losses. This would be the key issue for the current government to tackle to earn confidence of the voters in the coming elections.
Besides, the real estate consulting firm Knight Frank in its report has stated that the residential prices in the India’s financial capital Mumbai have fallen by almost 7 per cent, while Hyderabad witnessed 7 per cent rise. The report further added that the shocking default of the infrastructure lending giant Infrastructure Leasing & Financial Services (IL&FS) put a dampener on the market. The other key market such as Kolkata, Pune and Chennai too witnessed fall in prices to the tune of 4 per cent, 3 per cent and 3 per cent, respectively. On the positive side, the GST Council in its meeting is likely to cut the GST rates on under-construction flats and homes to 5 per cent. If this happens, then it might bring some cheers for the real estate buyers and investors.
As the earning session starts, the company’s true and fair picture will be revealed and then one can find better opportunities to pick stock ideas. The stocks with poor earnings quality must be avoided. As we continuously emphasise, that it is the quality of earnings that ultimately matters in the long run.
