India Inc. has started showing early signs of recovery. Markets have been waiting for this moment for more than a year now. As reported by Business Standard dated May 09, 2016, 350 Indian companies that have declared their Q4 results so far have seen their sales growing at 5.6%--the fastest rate experienced in last six quarters. Their net profits too have grown at a healthy pace of 16.9%. The performance of companies engaged in manufacturing activities has also been encouraging. As against the revenue growth of 3.9% registered in Q3 and 3.8% reported in Q4 of FY 2014-15, they have witnessed 5.8% growth in their earnings for Q4, FY 2015-16. Their net profit has gone up 15.8% during the same period.

How long the revival in corporate earnings last?

For quarter ending March 31, 2016, sample of 350 companies considered
(Source: Business Standard dated May 09, 2016)

A few days ago PersonalFN had written an article— Will May Be a Breakout or Breakdown Month This Year? We had urged readers not to pay attention to fancy adages such as “Sell in May and go away.” This was based on the premise that only fundamentals drive markets in the long run and not sentiments. Today, PersonalFN writes this article to caution those who plan to bet big on markets after reading about Indian corporates reporting encouraging Q4 results. There’s a possibility that good results may blindfold many you.

Detailed analysis suggests that lower commodity prices have helped companies improve their operating profit margins. Business Standard further reports that raw material cost of 196 manufacturing companies went down to 44.6% as a proportion of net sales vis-à-vis 45.5% on Y-o-Y (year on year) basis. However, there’s a rise of 20bps on a Q-o-Q (quarter on quarter) basis. PersonalFN believes one should not overlook these facts. After all, nobody knows when the commodity prices will rebound. It is entirely possible that the commodity prices might have already recovered from the trough. Moreover, companies engaged in the service sector, excluding those in the exports of Information and Technology Solutions had a tough time. Transportation and logistics, hotels, real estate, and telecom among others have collectively reported a fall of 21.8% in Q4 on Y-o-Y basis.

However, banks continue to feel the heat of bad loans. As reported by Business Line dated April 29, 2016, the cumulative gross Non-Performing Assets (NPAs) of large private sector banks shot up a whopping 62.5% in Q4, FY 2015-16.

Impact on mutual fund investors
Diversified equity schemes, in general, have a high exposure to the banking sector, and the worries of rising NPAs will keep them on the edge. However, schemes following the bottom-up approach have invested in stocks for their merits, quality of management, and revenue visibility. Recovery in corporate earnings may have rewarded them more than those sticking to the sectoral weights in broader indices such as CNX Nifty or S&P BSE 100 to name a few.

What to expect
India is expected to receive above-average monsoon this year. Good monsoon may revive the rural demand. Better monsoon may also assist in curbing the food inflation. As the Government will implement the recommendations of the 7th pay commission, household consumption is likely to get a boost. All these factors will have a positive impact on the performance of corporations. However, it remains to be seen how commodity prices and oil prices do going forward. The pace of key reforms such as GST would also remain crucial for the market movement.

What investors should do?
PersonalFN believes, chasing market momentum in any form may prove harmful for your investment portfolio. Smart investors chase neither the index levels nor track corporate earnings. On the contrary having an eye on valuations pays off better.

Those who cannot choose winning stocks on their own should leave it to professional fund managers and invest in mutual funds. Here too, you should select an equity diversified scheme carefully from a plethora of available options. Investing in those with proven long-term record across market phases may help you attain your long-term financial goals. Schemes from fund houses that follow strong investment processes and systems are more dependable. PersonalFN provides a detailed analysis on such schemes in its mutual fund research reports.

PersonalFN believes rather than corporate revenue, your earnings determine your success and more than the market’s expectations, our financial goals provide guidance for finances.

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