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Earnings Scorecard

Aug 29, 2016

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” – Peter LynchSummary

Equities

With 43 companies in the Nifty 50 having reported earnings so far this quarter, 56% of companies have reported a positive surprise versus their expected numbers, while only 30% have reported negative surprises.The largest number of positive surprises came in the Consumer Discretionary sector, while the largest number of negative surprises have been in the Financial sector.Breaking down the numbers further, the underperformance in Financials was driven down by PSU banks and heavily indebted private sector banks.While more than half the Nifty 50 surpassed analyst estimates, positive and negative surprises were about even for the broader market.

24 of 43 Companies in the Nifty 50 Have Delivered Positive Surprises So Far…

Nifty 50 signals at P/Es greater than 23.5

Positive and Negative Surprises Are About Even for the CNX 500…

Nifty 50 signals at P/Es greater than 23.5

And Better Than Even for the CNX 200…And Better Than Even for the CNX 200…

Nifty 50 signals at P/Es greater than 23.5

For the Broader Market, Adjusted Sales are Up 3.0% and Adjusted Earnings Up 14.8%

Nifty 50 signals at P/Es greater than 23.5

Nifty 50 Adjusted Sales Growth is 3.7% and Adjusted Earnings Growth 16.0%…

Nifty 50 signals at P/Es greater than 23.5

Earnings Review – Nifty 50

This quarter, a truer picture of the Nifty 50 emerges only once we adjust for two PSU bank results, two telecomm majors and a utility that reported absolutely woeful results, large enough to skew the broader picture of the remaining market.Adjusting for these items, sales are up 3.1% year over year, while earnings are up 15.2%.Materials delivered the largest upside surprises versus their expected earnings for the quarter, while Consumer Staples and Industrials delivered the worst downside performance.Sales growth, excluding PSU banks and other large swings that skewed results, was up 3.7% year over year.Earnings growth fared even better, up 16.0% year over year. 25 stocks delivered earnings growth in excess of 18%, demonstrating that overall breadth of performance is strong.

Earnings Review – CNX 500

Our adjustments for the broader market were limited to PSU banks and the two telecomm majors. Adjusting for these items, sales are up 3.1% year over year, while earnings are up 15.2%.Materials delivered the largest upside surprises versus their expected earnings for the quarter, while Consumer Staples and Industrials delivered the worst downside performance.Sales growth, excluding PSU banks and other large swings that skewed resutls, was up 3.0% year over year.Earnings growth fared better, up 14.8%. Earnings in Staples, Financials, Health Care, Industrials and Materials each delivered in excess of 15% year over year growth.

Industry Review – CNX 500

As is clearly evident from the tables on the following pages, Financials (ex PSU) were the clear standout performers. The Capital Markets sector is one we’ve spoken about often and it delivered a huge positive surprise.Consumer Staples were strong performers on the bottom line, but not as much on top line growth. Pharma delivered strong numbers and looks on its way to reclaiming its place as a strong overweight sector in investor portfolios.Industrials performance was mixed. IT Services were strong performers on top line growth but could not convert top line to earnings. Finally, Materials delivered strong bottom line growth.

Industry Earnings Surprise, Sales Growth & Net Profit Growth – Q2 CY 2016

Nifty 50 signals at P/Es greater than 23.5Nifty 50 signals at P/Es greater than 23.5 

Technical Strategy

Range bound action for the Nifty50 index continues with a 1.09% decline for the past week to close at 8573 level. Broader indices like the BSE Midcap and Smallcap too saw a flat closing last week.Compared to first half of August, FII flows have seen a slowdown in the cash market during the latter half.Technically Nifty is at important support level as seen from the chart below. It is trading at medium term support trend line and also at the short term support trend line. This level comes around at 8540, which needs to be watched going ahead.Momentum indicators on weekly chart are showing negative crossover and coming off overbought levels, but confirmation will come once price shows a breakdown. But, if market manages to hold these levels, then market can rally on the upside.Crossing above its hurdle zone of 8700-8730 levels, market will see breakout from four weeks of sideways movement and trigger fresh rally. Then the level on the upside is likely to be 8900-8950.On the derivatives front, the September series saw good rollover of positions from August series with higher cost of carry, suggesting long positions have been carried forward. Nifty rollovers are above their two year average with stocks also seeing higher rollovers compared to previous series.In index futures, FIIs too carried forward a huge amount of long positions. The Nifty option open interest Put/Call ratio is at 1.04, which is higher, indicating a base for the market. Maximum open interest in Nifty Put option is seen at 8500 strike followed by 8400. Thus, suggesting strongNifty 50 signals at P/Es greater than 23.5support level for the market around 8500-8450 levels. Broadly, market has critical support around 8500 odd levels, holding above this Nifty is likely to see move on the upside. But, if it breaks below 8500 levels, then market is likely to see decline towards 8260 odd levels. 

Outlook

The saving grace for the Indian market is that earnings growth at a level deeper than the index shows that Indian companies are continuing to perform and deliver.The domestic recovery is broadening with services remaining strong and rural in line to contribute to economic growth in coming quarters.Our preferred strategy remains a buy on dips strategy. Stock selection will be a key determinant of portfolio returns in a period such as the one we’re in.There’s always something to fear that could derail the market — profit margins, valuations, earnings, growth, interest rates, inflation/deflation, geopolitical risks and on and on. But bracing for a correction can often be to investors detriment.
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