Clifton Desilva is an investment expert and a Director at Altina Securities.
The earnings season continues and many past fancied stocks continue to underperform though there may be some marginal signs of a modest turnaround. Stocks which were fancied in the past like Crompton Greaves and Hindalco reported earnings which did not meet market expectations.
In the case of Crompton Greaves the earnings reported by the company fell fall below street expectations.
For the quarter ended March, the company reported a 74.7 per cent decline in net profit at Rs 25.3 crore, on a turnover of Rs 3,387 crore, a rise of 10 per cent year-on-year. The dismal performance was primarily due to significant erosion in margins and continued losses in the international business.
During the quarter, the company’s power systems segment, which accounts for about 60 per cent of its revenue, reported a fall of 2.8 per cent in margins, led by higher proportion of low-margin systems business in the overall revenues. This is a reason why despite the revenue growth, consolidated margins fell to 2.3 per cent, against 6.9 per cent in the quarter ended March 2012. The consumer business (22 per cent of revenues) recorded 23.3 per cent growth in revenue.
The biggest worry stems from the company’s foreign business, which accounts for about half its revenue. The standalone power system business reported a 7.1 per cent Ebit (earnings before interest and tax) margin on a turnover of Rs 836 crore, while the corresponding business for subsidiary companies, including foreign ones, reported a 9.6 per cent fall in the Ebit margin, on a turnover of Rs 1,224 crore.
The foreign business which has been a drag on the company’s performance is undergoing restructuring and has begun to yield results, though any significant gains may not materialize in the immediate short run.
However, next year could see greater benefits of restructuring of the company’s global business. Benefits of the recent correction in commodity prices should also be seen, and a strong order book should drive growth. In FY13, the company’s order backlog increased to Rs 9,126 crore, against Rs 8,366 crore in FY12, indicating room for growth. The stock which was at a 52 high of Rs 143 and a low of Rs 87 is currently quoting at Rs 93 and it appears that for the time being most of the positives have already priced in the valuations. However, there could be gains for those investors who are willing to take a long term bet on the company.
The fourth quarter numbers of Hindalco are a mixed bag. On a comparative basis the fourth quarter numbers continue to indicate the stress in metals and mining.
However, if a comparison of the performance sequentially is identified it shows signs of improvement. While the sequential improvement is positive, the sharp uptick in debt has come as a negative surprise.
Compared to last year, Hindalco’s net sales fell nine per cent during the fourth quarter but rose two per cent to Rs 7,000 crore sequentially. Volumes are down compared to last year but sequentially these have picked up. Copper cathode and alumina volumes have remained flat sequentially, though these are substantially down year-on-year (y-o-y). Operating profit rose 11 per cent sequentially to Rs 640 crore, but was down 26 per cent y-o-y. What remains unchanged is the pressure on costs. High input costs (especially higher fuel and power) have kept operating margins under stress, which declined 211 basis points y-o-y to 9.2 per cent in Q4 but expanded 73 basis points sequentially. The sequential improvement suggests things are not worsening.
The stock which was at a Rs 52 high of Rs 137 and a low of Rs 87 is currently quoting around Rs 102. Here too it appears that some of the positives appear to be factored in the valuations. However, investors who have a long term horizon could benefit at current prices and further declines.
During the earnings season there are several blue chip companies that have reported earnings below street expectations. The below than street expectations earnings results in price declines, sometimes sharp. These sharp declines should be used as an opportunity to acquire these shares at attractive valuations and build up a portfolio with a potential to generate excellent returns over a time frame of a year.