The two most likely parameters for a stock to continue carrying a premium valuation are earnings growth and future outlook. During the June quarter results season, we saw a few corporate names, including retail-favourite multi-baggers, fail the earnings test.
Data from some sources show a host of companies with at least Rs 5,000 crore market capitalization listed on it. Over the months, it found that around 13 such entities reported at least a 25 percent YoY drop in sales and profit.
RVNL, Sobha, PTC Industries, Bharat Dynamics, Bengal & Assam Company and Suven Pharma are the names of six multi-baggers.
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Shares of railway PSU Rail Vikas Nigam (RVNL) have gained 356% in the last year, but, Q1 sales dipped by 27%,, and profit fell by around 35% year over year around 35.
Quarterly profit of Bharat Dynamics slumped 83% alongside a large-sized decline in sales, which was around -36%.
While ITDC shares have also gained nearly 100%, money was almost doubled in a year. However, the company reported a 32 percent drop in profit and a more than 28 percent fall in topline.
The sharp surge in small and midcap share prices have pushed India’s market caps/gdp ratio as high at 150%, well ahead of the PAT/GDP cycle. This, analysts say, justifies a pause in m-cap-to-GDP expansion until earnings catch up.
The positive is MCAP/GDP of large cap at 95%, way below its last peak of (108%) and not much ahead on ‘PAT / GDP’ level, a steady state picture with hire to grow-driven PAT growth which stood quite low as yet, Vinod Karki said in ICICI Securities. If you have more visitors from Facebook, then your weighted conversion ratio or page visits will go down.
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What should investors do?
If the market was looking to lower growth to last longer, then companies with declining earnings growth may be due to a price correction.
An analyst’s note cites that when a company’s earnings growth takes off its foot from the accelerator, investor patience might wear thin and purchased are sold, resulting in declining stock prices.
Market players often change their valuations based on future performance expectations, so if earnings are lower than expected, then stock prices will adjust as the anticipated outlook revised downwards,” Anil Rego, Founder & Fund Manager at Right Horizons said to a well-known source.
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Many companies that fell short of earnings estimates have yet to be punished by the stock market, which escalated a two-month general election and heat wave across the country during the quarter. Meanwhile, the wider market has remained resilient as a result of solid flows from domestic liquidity.
That being said, if any company on this list does not meet the prospects for 2QFY25 also then it is likely we will see a sharp correction take place in its share price. “A correction of that nature should be confined only to the respective company and would get quickly.
A lot of stocks have rallied in the last couple of years on order inflow and/or an expansion in addressable market apps. In these situations, we usually see the rally start as further (P/E) expansion is followed by earnings (EPS) growth.
Moreover, suppose the earnings do not live up to expectations. In that case, we see a violent market reaction as the stock price is adjusted in response to lower annualized earnings and PE contraction,” he said.
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