Insights

Is the market rally backed by fundamentals?

November 30, 2017 . Vidya Bala

Synopsis

  • Earnings revival in Nifty 50. Banks supported the revival
  • Larger companies do better than smaller ones
  • Price increase in inputs managed well by companies
  • Asset additions happening in pockets
  • Only stock-specific opportunities rather than sector opportunities may pay off

Whether it was bank recapitalization or infrastructure spending or the recent upgrade of India by Moody’s, every opportunity has been used to propel the stock market. With the kind of run-up, the stock market has had this year (27% returns in Nifty 50 in the past 1 year) it is necessary to examine whether the rally was merely driven by positive sentiments or backed by some fundamentals – that is earnings growth. This will also tell us what opportunities were tapped and what remains to be tapped. It will also caution us as to what to expect from fund managers, both in terms of performance and strategy.

The September quarter of FY-18 is a good point to assess corporate performance for multiple reasons: it has seen a quarter post GST implementation; it provides enough time to review performance post demonetization and it is a period when the benefit of low commodity price no longer exists. Above all, it is a period after most banks have taken the worst hit in their books on NPAs.

Before we get into details, here is a synopsis of the results itself.

Earnings recovering

 Growth over a year ago quarter
Nifty 50Sep-17Jun-17
Sales 10.6%9.9%
Net profits12.2%-0.5%
Broad market (1977 companies)Sep-17Jun-17
Sales 7.9%7.7%
Net profits-1.8%-10.7%
Includes consolidated numbers where applicable. Source: Cline.
Growth is over the same quarter of last year

  • The bellwether index of Nifty 50 saw a double digit in sales in the September quarter (over a year ago) and importantly saw a double-digit growth in earnings, after six quarters of muted earnings. That basically suggests an earnings revival.
  • Banking stocks buttressed the Nifty 50 sales and earnings growth. Without banks, the earnings growth for the September quarter would have been less robust at 9.7%. This means, the heavy-weight banking sector has stopped weighing on equity earnings and that is an important clue. Earnings support from this sector can provide a significant boost to index earnings.
  • For the broad market (1977 companies with consolidated results, wherever applicable), sales growth was at 8% year-on-year while net profits declined by close to 2%. The earnings growth may appear poor here but needs to be broken down to understand why it appears so. The broken-down numbers tell us that the muted performance in the broad market were influenced by few large companies with depressed numbers such as Reliance Communications, MTNL or textile company Alok Industries.
  • However, the trend becomes clearer if we break down the universe in terms of market cap. Larger companies did better than smaller ones. Stocks with a market capitalisation of over Rs 5,000 crore did well with a sales growth of 9% and profit growth of 8%. For stocks with market-cap of less than Rs 5,000 crore, sales growth was just 3.3% and it had losses at a net level. Here again, few stocks from infrastructure, paper, steel, textiles and telecom bogged down the results. In other words, the trend in the Nifty 50 is more or less representative of the larger universe of stocks with market cap of over Rs 5,000 crore.
  • In our universe of 1977 companies, more companies (53% of the universe) saw an expansion in profits in September quarter (over a year ago) as opposed to 47% in the June quarter. But this trend is more pronounced with larger companies. 64% of the companies in our universe, with market cap above Rs 5,000 crore saw an increase in profits as against 53% in the June quarter (over a year ago). Here again, quality companies (larger market cap) are clearly leading the profit growth.

To read more on sector trends and what opportunities lie ahead, please check your email for the full research report, if you are a FundsIndia investor.

Disclaimer: This document has been prepared and distributed by FundsIndia. The information in this document has been compiled by FundsIndia’s Mutual Fund Research team. We have, to the best of our ability, taken into account various factors, both quantitative measures and qualitative assessments, in an unbiased manner. We have reviewed the report, and insofar as it includes current or historical information, it is believed to be reliable, though its accuracy or completeness cannot be guaranteed. Mutual funds are subject to market risks, as well as analysts’ expectations about future events. This document should not, therefore, be the sole basis of investment decisions. Past performance is not indicative of future returns. Investors should read the Scheme Information Document and Statement of Additional Information carefully before investing. Neither Wealth India Financial Services Pvt. Ltd., nor any person connected with it, accepts any liability arising from the use of this document. This material is for the personal information of the authorized recipient, and no action is solicited on the basis of this. It is not to be construed as an offer to sell, or the solicitation of an offer to buy any scheme, in any jurisdiction, where such an offer or solicitation would be illegal. This document may not be reproduced, distributed or published, in whole or in part, without prior permission.

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