Reading quarterly results

Quarterly results enable you keep track of the stocks you own.

Its that time of year again, when results declarations either send stocks on a happy march upward or leave them crashing to the ground. Companies publish earnings at the end of every quarter, giving investors and market participants a clear picture of how they have grown revenues and profits, managed costs and are likely to perform going forward. The bigger picture demonstrates how quarterly results of companies put together show which sectors have performed best, which have faltered, and finally, what India Inc. has done every three months.

While you certainly don't need to calculate how sectors have performed on your own – that exercise calls for a lot of painstaking data collection – you do need to look at the quarterly performance of stocks you own. Consistent poor performances for two quarters or more could be an indicator of exiting or booking profits in the stock. Here's a few pointers on how to read quarterly results declared by companies, using the current March '11 quarter as a reference.

Revenues and profits

The first step is, of course, to check how revenues and profits at the operating and net level have fared. There are two ways to look at growth. One, figures in the current quarter can be compared to those in the previous one, i.e., comparing March 2011 quarter with the December '10 quarter, known as sequential or quarter-on-quarter comparison. Two, a quarter can be compared with the same period in the previous year, i.e., March 2011 with March 2010 or a year-on-year (y-o-y) approach.

How do you decide which one to use? A sequential comparison is not applicable to sectors that are subject to seasonal fluctuations, as it could skew growth figures. Consider the March '11 results for retailer Shoppers' Stop for example. Compared to the December '10 quarter, the March '11 quarter saw a 5 per cent dip in revenues. However, festival buying – a period in which retailers get the maximum sales – is concentrated in the September and December quarters and is hardly present in the March quarter.

It thus makes more sense to take the y-o-y approach and compare the March '11 quarter with the March '10 quarter for a more accurate growth figure - in which case revenues have grown a whopping 59 per cent. Other sectors where a y-o-y comparison is specifically a better option include gems and jewellery, consumer durables, infrastructure, cement, power, metals such as steel and agri-based sectors such as fertilizers.

For manufacturing sectors such as automobiles, FMCGs, gems and jewellery and so on, check growth in volumes as well. Where companies have increased prices of their products, growth in sales could have come from price rises rather than increase in number of products sold.

To sustain growth in the long term, volume growth is essential. Also check ‘Other Income' and ‘Extraordinary Items' which is any income flowing to a company that does not pertain to its operations and which may or may not occur regularly.

It could be sale of land, interest earned on investments, foreign exchange gains or losses and so on. For instance, net profit of Bata India for the March '11 quarter grew by almost 8 times on a y-o-y basis because it sold off stake in a joint venture.

This quarter, cost management takes centre stage as input prices such as oil, steel, copper, cotton, cement and others have been on a relentless climb upward. Take raw material costs as a percentage of sales for the March '11 and December '10 quarters to check effects of input cost increases. A steady or lower figure means that it has been able to rein in input costs through lower consumption, large inventory already acquired at lower costs or, if it has pricing power, passing hikes on to customers. Calculate operating margins by dividing operating profits by net sales. The higher the margin, the better it is. It indicates the room your company has to take in stride rise in costs - whether raw material, advertising, administration or wages.

Cost management

For example, infrastructure player Sadbhav Engineering saw operating margins drop over 3 percentage points to 9 per cent in the March '11 quarter on rising prices of steel and cement. On the other hand, Madhucon Projects, also an infrastructure company, managed to contain margin erosion to just under 2 percentage points.

The next key cost factor for the March quarter is interest. With attempts to rein in inflation, interest rates are on the rise. If your company operates on high debt, or if interest outgo has grown substantially in FY-11 compared to FY-10, profits are likely to see sharp reductions. Debt figures though are usually only available at year-ends in the balance sheet. Still, FY10 debt, together with growth in interest costs for FY-11 indicates whether your company will fall prey to higher interest costs. Here too, calculate interest cost as a percentage of sales to gauge how much of revenues go towards servicing debt.

For instance, Alok Industries, a textile player, has had debt-equity of over 3 times for the past three years. However, through monetising land banks, interest costs have actuallydeclined 12 per cent in the March quarter. Some companies do provide basic balance sheet figures in stock exchange filings of their results announcements.

Finally, calculate net profit margins by dividing net profits by net sales. Here too, higher the margin, the better. Net margins indicate how much you, as a shareholder, have got from the company's operations.

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