Of Recovery in Corporate Earnings, Pressure on Profitability of Public Sector Banks and Top Stocks in Action Today

Fri, 16 Feb Pre-Open | Parth Parekh, TM Team

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Corporate Earnings Zooms in December Quarter

Peter Lynch in his famous book 'One Up on Wall Street' quotes:

• "If you can follow only one bit of data, follow the earnings-assuming the company in question has earnings. As you'll see in this text, I subscribe to the crusty notion that sooner or later earnings make or break an investment in equities. What the stock price does today, tomorrow, or next week is only a distraction."

We to believe that in the long-run, share prices tend to move in the direction of the earnings growth. And the recent data on corporate earnings is nothing but a positive signal.

As reported in Economic Times, the corporate earnings growth of the December 2017 quarter is the strongest in the preceding six quarters. Led by a stellar performance by the consumer-focused businesses, the revenue and net profit growth for December 2017 quarter stands at 11.5% and 27.5% respectively as compared to a year ago for a sample of 2,043 companies. The operating margins of the sample companies too increased to 16% from 15.2% in the year ago quarter.

Performance of Different Sectors in December Quarter

Sectors Performing Well	Sectors Showing Stress
Automobiles	Capital Goods
Lubricants	Pharmaceutical
FMCG	Cement
Metal	Power

However, it is imperative to note that the last quarter of the preceding year was impacted by demonetization. Hence, the growth figure seems to be higher on a lower base. A sustainable earnings growth in the upcoming quarters will have to be closely tracked to conclude that the recovery in earnings is not just because of the lower base.

Profitability of Banks Could Come Under Pressure Post RBI Directive

The new RBI directive states that once a default has occurred, the bank will have 180 days within which it should come up with a resolution plan. Should they fail, they will need to refer the account to Insolvency and Bankruptcy Code (IBC) within fifteen days.

Once an account is referred to IBC, a provision of 50% needs to be made in the books of accounts. Earlier, banks used to delay the recognition of such high provisions by restructuring the accounts in schemes such as Corporate Debt Restructuring (CDR), Scheme for Sustainable Structuring of Stressed Assets (S4A) etc. These schemes have now been scrapped wherein the banks accounted for just 15% provisions.

In the new structure, all lenders are required to sign a restructuring plan for it to be approved. Else the account goes to IBC. Earlier, only 60% of the creditors by value had to approve the plan.

Reportedly, nowhere in the history of Indian debt restructuring have 100 percent of the lenders involved, agreed to one plan. Hence, it is likely that a majority of the cases go to the IBC which in-turn would lead to higher provisioning and this can deteriorate the profitability of the weaker banks in the short run.

Top Stocks in Action Today

Post the fraud, the stocks of Punjab National Bank and Gitanjali Gems could face further downward pressures in today's trade. Further, owing to the RBI directive and the negative sentiments, the public-sector bank's too could face some pressure in in today's trade. The stock of Varun Beverages too will be in focus as it declares its results for the quarter ended December 2017.

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