Of earnings and shares: Numbers paint a gloomy picture

Much before the coronavirus pandemic wiped out the sales for India Inc, the corporates were already reeling under severe stress due to the prolonged slowdown in the economy.

A DH analysis of financial and market-related metrics of Nifty50 companies during the March quarter of FY2020 reveals a gloomy picture.

In normal circumstances, all companies should have declared financial results by May 31. But due to the lockdown, imposed to battle the COVID-19, the regulator has extended the deadline to June 31.

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As a result, by the end of Saturday, 33 of the Nifty’s 50 companies, making up 84.41% of the index have declared their results. On the indices, all companies are not treated with equal weightage. The weightage of any company depends on its free-float market capitalisation: the more the free-float market capitalisation, the more weightage it has on the index.

Of these 33 companies, 23 that make up 63.6% of the index have reported contraction in earnings and losses. Dragged down by losses reported by Vedanta, the earnings of these companies have contracted by 51.34%, to Rs 37,407.95 crore in the quarter ended March 2020, from Rs 76,876.83 crore in the quarter ended March 2019.

Anil Agarwal-led Vedanta, reported a whopping loss of Rs 12,521 crore in March quarter, which it said, was on the back of impairment worth Rs 17,132 crore in oil and gas assets. These huge losses aren’t new to the company. In the March quarter of 2015, and 2016 as well, the company had reported massive losses, that make up one of the biggest quarterly losses in Indian corporate history.

Even if we remove the impact of Vedanta’s loss, the remaining 32 companies saw the earnings deplete by one-third to stand at Rs 49,608.95 crore in January-March 2020, from Rs 74,057.83, a year ago.

But, that is not all, the hit has started right from the top of the earnings statements of many companies. Of Nifty50 companies, 12, making up 15.74% weightage on the index, have seen the revenues shrink.

The topline of all the 33 companies has shrunk by 1.11% to Rs 6.96 lakh crore from Rs 7.04 lakh crore a year ago.

So, as we can see, before the coronavirus gripped the Indian corporates, the slowdown was worsening already. In fact, it is reflected in GDP numbers as well, India’s GDP growth slowed down to 4.2%, according to official numbers. But, the former Chief Statistician of India dropped a bombshell, saying that GDP might have been over-estimated by Rs 2 lakh crore, and adjusting that, the growth number comes down to just 2.8%.

Irrational exuberance at peak

But the bigger question to ask is whether investors are paying the right amount for these companies. While the earnings have shrunk, for now, by 51%, the Nifty50 is trading at a loss of just 14.4% -- a clear-cut disparity in the numbers.

Many analysts, over the course of the past two months, have questioned the fundamentals of the rally by the stock markets. There can’t be a bigger disparity than a roaring stock market amid the worst recession seen in the history of India.

In fact, if you look at the share prices of Nifty50 constituents, 37 companies are giving a 52-week negative return. Of the remaining 13 companies that are giving positive returns for the past year, five are giving positive returns despite the fact that their earnings have shrunk, and in some cases made losses. And two others are pharmaceutical companies, that have seen shares surge on the prospects of making money from Covid-19. So, this implies that investors are paying for the earnings that don’t even exist.

At a time when 36 of the Nifty50 constituents, making up 63% of the index, are still in the bear market territory, Nifty is out of the bear market territory -- a situation triggered when a share on an index is down by 20% or more from their respective life-highs. If all these numbers convey anything, it is the fact that the market has been more polarised than ever. The gains in the markets have been driven by a very select group of companies.

But why are the markets roaring?

The global stimulus packages, which have been in the range of $5 trillion to $6 trillion till now, have pushed a lot of liquidity in the global financial markets. And a lot of this money is getting parked in stock markets globally, including India.

At a time when investors with a lot of money are bottom fishing in the equities, these rallies driven by irrational exuberance are expected. Of the 33 Nifty50 companies that have announced the results, 23 have seen a dip in the price to earnings ratio for trailing twelve months (TTM). That, in essence, means that investors are paying way lesser than they were a year ago. In some profit-making companies on Nifty50, the price paid for every penny earned by the company has crashed by three-fourths of the year-ago value.

In financial markets, ratios such as price to earnings, are calculated on TTM basis, so as the benchmarking is even-steven because companies don’t adhere to a similar financial calendar across the board.

But this bottom fishing doesn’t still justify the surge in the equity market. Markets usually trade on expectations of forward earnings. And what do we have there: on-going quarter has been completely wiped out, and the future looks more uncertain than ever.

As a senior banker, on condition of anonymity, once told DH, “Traders and operators are still living in fool’s paradise thinking the worst has been priced in. Real blood-bath will start only after Q1 earnings are announced.”