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Q3 results: Here are some stocks investors can opt for

As economy is set to pick up pace, here are some stocks that investors can opt for since they offer good buying opportunities.

, ET Bureau|
Feb 11, 2013, 09.25 AM IST
Stocks in news: Hindalco, Cipla, IGL, Blue Star
There are smiles, accompanied by a few groans. This about sums up the reaction to the earnings report of the third quarter of 2012-13. While there have been hits and misses at the sectoral or company level, the overall results are satisfactory.

The aggregate sales of the BSE-500 companies, which have declared results so far, have gone up by around 15%. They have also achieved a better net profit growth of 24% for this quarter, powered by a low increase in expenses like depreciation (13%) and tax (7%). Says Dipen Shah, head, fundamental research, Kotak Securities: “For most of the companies, the third quarter numbers so far have either been in line with or slightly better than expectations.”

One reason for this is the low expectations and downcast mood of the market before the results season. Most analysts had been chipping away at the expected earnings over the past several quarters, bringing it close to the bottom. The good news is that the consensus earnings per share (EPS) estimate for the Sensex has not fallen further in this quarter, bucking the trend of the past several quarters.

This signals that the downgrading cycle for corporate earnings has come to an end, at least at the broad market level. Where do we go from here? According to general consensus, India Inc should be able to replicate this good performance in the coming quarters as well. Some are hopeful that it will not only remain steady, but actually improve. “There is a possibility of earnings upgrades in the coming quarters,” says Kishor P Ostwal, chairman and managing director, CNI Research. This optimism is being fanned by two factors. First, India Inc has shown resilience in an extremely difficult environment and managed to report satisfactory numbers. This means that it should be able to deliver a much better performance when the economy picks up.

According to Deven Choksey, managing director, KR Choksey Securities, a mere 1% increase in GDP will result in an improvement of nearly 5% in the corporate earnings. The other factor includes the recent economic reforms unleashed by the government and the trimming of interest rates by the RBI. Both these actions should spur on India Inc in the coming quarters. The overall inflation has also started falling and if it doesn’t spike again—the only fear here is the jump in international crude oil prices due to a weakening US dollar—then the apex bank is expected to continue with the rate reduction, which is sure to benefit the entire economy.

Q3 sectoral performance

Improving sectors

The following sectors are worth watching closely in the near future.

Aviation: Due to the problems faced by Kingfisher Airlines, which increased its loss to Rs 755 crore from Rs 444 crore during the same period last year, and unlisted Air India, the other listed aviation companies managed to report a smart turnaround. Jet Airways posted a net profit of Rs 85 crore for the third quarter, whereas it had reported a net loss of Rs 101 crore in the same quarter last year. Similarly, SpiceJet succeeded in reporting a net profit of Rs 102 crore compared with the Rs 39 crore loss in the same period last year. Are these stocks worth buying at the current price? “Since the Jet Airways and SpiceJet stocks have already rallied a lot, investors should wait before buying into these counters,” cautions Ostwal. They also need to keep in mind that most of the basic problems faced by the sector, be it high aviation fuel cost or airport bottlenecks, continue unresolved.

Oil & gas: This sector may report much better results in this quarter helped by the improvement in refining margins. The proactive measures of the government, including partial decontrol of diesel to reduce the oil subsidies, also brighten the outlook for the sector. Is there a risk that the government might backtrack in the near future? “The government is much more accountable now and it is unlikely that there will be a rollback in diesel prices,” says Choksey.

However, will the oil companies be allowed to increase the retail diesel price for the next several months, especially when it is close to the elections? Unlikely, and this is the reason it may be risky to bet on PSU oil companies now. Reliance is also not a good bet because of the increase in its stock price after the results and the uncertainties it is facing on natural gas pricing. Currently, the best bet from the sector is Cairn India. “Though the results were good, the price came down because of the overhang related to the group. So, it is good value for money now,” says Jigar Shah, head of research, KIM ENG Securities.

Information technology: This sector, particularly Infosys, has shown remarkable improvement in the previous quarter. The performance of other companies, such as TCS and Wipro, was also up to the mark. Since they are not affected by the domestic economic problems, they may continue to attract investor interest. However, don’t rush blindly to pick the stocks. “I do not see much opportunity in the Infosys counter now,” says Sudip Bandyopadhyay, managing director, Destimoney Securities. This is especially so after the market has rewarded it by pushing up the price by 20% within a few days. “Instead, I would prefer to bet on TCS, the timetested IT major,” he adds.

Lacklustre sectors

Despite the overall improvement, some sectors continue to be in trouble.

Infrastructure: L&T may have delivered a good set of numbers, but the sector is still struggling. Bhel’s bad performance in this quarter is due to the lacklustre show by the power sector and the resultant fall in orders. While the expected rate reduction by the RBI will help the companies in this space, they are still struggling with other issues like project delays. So, it may be a few more quarters before the sector shows clear signs of recovery.

PSU banks: The public-sector banks were expected to show an improvement in performance and reduce the gap with their private-sector peers, but it did not happen in this quarter. As a result, the valuation gap between the two has widened again. How should one play this space? “We were expecting asset quality concerns among PSU banks and will prefer the private-sector banks,” says Dipen Shah. The consensus is that the asset quality concerns will remain for a few more quarters, at least till there is a visible improvement in the broader economy or the problem sectors such as infrastructure and construction. This does not mean that you have to ignore the entire space. “The correction in Bank of Baroda due to high provisioning in this quarter should be used as a good opportunity to buy at lower levels,” suggests Choksey. The increase in provisioning is because of the management change and is a common phenomenon among PSU banks.

FMCG: The sector has come under pressure due to the demand slowdown. Though most companies declared a decent set of numbers, it could not satisfy the market participants because the expectations were too high. This resulted in a massive sell-off after the result declaration. Nonetheless, experts feel that the present demand slowdown is not alarming and that the structural consumption story is intact. The valuation, however, remains a major concern. “HUL is a good buy at current levels, while Jubilant Foodworks will also be a good bet if the price slides to Rs 900 levels,” says Bandyopadhyay. The early reports in this earnings season give investors a lot of hope and could bolster the market sentiment. With careful stock picking you can assure high returns for yourself as the economy gears to pick up pace in the coming quarters.

Projected Sensex earnings

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