Figure out quarterly numbers

INVESTING

It's the earnings season once again. So the obvious question for the investor would be, what should he look for in the December quarter numbers?

Interestingly, all eyes this time around are on the sales/revenue numbers "" the focus is not on profit gains, as in the past.

This is because in the third quarter of a fiscal, signs of growth momentum are more crucial than other parameters.

So a reasonably strong topline growth, on a higher base (higher because sales have been continuously growing in the past many quarters), would reinforce that the economy is in good shape, demand is not flagging and that there is purchasing power. In short, that things are fine.

Not too many expect major gains in operating margins. Even if firms remain stable on this score, it would be fine. Know why? It's because raw material costs have soared, interest rates are rising and companies would take some time to adjust to competitive pressures.

Let's take some sectors to understand the numbers:

BANKING: For banks, this is the busy season with loan disbursals rising in the third quarter to Rs 64,000 crore. This means the environment is conducive to growth. If any bank, therefore, has not been able to grow its assets (basically it's loan portfolio), it would be a shame.

Comparisons for banks are made annually and not sequentially since there is a seasonality to their business. The key numbers to watch out for are the net interest income (the difference between interest earned and interest paid) and the net interest margin (the percentage of net interest income to average deposits).

With the interest rate cycle moving north, net interest income should be up smartly for banks since loans are repriced immediately, while deposits are repriced with a lag.

In HDFC Bank's case, net interest income is up a good 23 per cent and net interest margin an impressive 3.7 per cent.

For a bank, 'other income' is income earned from investments and fees. In the last two years, banks have made huge profits from treasury operations (buying and selling government securities) and have used this to provide for non-performing assets or loans on which there are defaults.

The percentage of such loans should fall over a period. If a bank shows higher numbers, it would be a matter of concern since it would mean the bank is not able to lend to quality companies or that its retail loans are turning bad. Non-performing loans of below one per cent would indicate excellent assessment of credit risk by a bank.

MANUFACTURING: For a manufacturing company say, Tata Motors or Hindustan Lever, the net sales figure (gross sales minus excise duties) would tell us whether the firm's products are selling fast enough. Other income should normally be excluded from the net sales since that is not part of the core business.

The topline "" or sales "" growth is crucial especially since the base level is now high, though it should be looked at in conjunction with the growth in the industry. To gauge whether the firm has pricing power, take a look at the sales per unit.

If this is not moving up it implies that though a company is able to sell higher volumes it is not able to realise a better price possibly because there are competitive pressures, eg Hindustan Lever has cut prices of detergents and shampoos in a bid to hold on to its market share.

The growth in the earnings before interest depreciation and tax (EBITDA) would give an indication of whether a company is able to grow its sales faster than the rise in expenditure. This is particularly important now with prices of key inputs such as steel, power or coal having gone up.

The EBITDA margin (EBITDA/(Net Sales-Other Income)) should in the normal course move up. It would then mean that the firm is able to scale up efficiently i.e. manage higher profits on a higher turnover, keeping costs in check.

In this quarter, no major margins expansion is expected since much of the operating leverage that came with lower interest costs seems to be over.

All comparisons would have to be made year-on-year since sales of two-wheelers, for instance, are usually higher during the festive months while volumes tend to slow down during the monsoon.

For FMCG firms, market share data usually provide clues as to how the firm is growing.

Also, advertising spend is an important component of an FMCG firms expenses "" it is usually looked at as a percentage of sales "" and if this ratio is coming down without jeopardising sales, it means the firm is confident of selling with lesser advertising support.

Depreciation is another number which needs to be tracked, now that companies are expanding capacities. A higher depreciation could mean that a new plant has been commissioned.

There are some firms "" for instance, Mico, Goodlass Nerolac and SKF Bearings, which traditionally are more aggressive while providing for depreciation.

These firms should be valued on a CEPS (cash earnings per share) basis otherwise the price earnings multiple (P/E) could be misleading.

This is generally true for capital intensive businesses. For capital goods manufacturers, the orderbook position, which is sometimes mentioned with the results, gives an indication of what kind of revenues can be anticipated.

Interest costs, which have been coming down over the last couple of years, are likely to go up now with the rates moving up and companies seeing higher levels of capacity utilisation and require larger amounts of working capital. Only those with strong cash flows would be able to control interest costs.

PHARMACEUTICALS: For Indian pharmaceutical firms, in addition to the usual numbers, one should look at the geographical break-up of sales "" exports are becoming very important.

On the cost side, a jump in other expenses ""which is usually the cost of filings for new products and R&D "" -needs to be studied to see on what the money is being spent.

While any set of numbers does give us some idea of a how company is coping with competition and other changes they do not always tell the whole story. So, just as one swallow does not a summer make, one quarter cannot represent a firm's long term performance. But yes, it's a performance report, nonetheless.

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BANKING

Comparisons for banks are made annually and not sequentially since there is a seasonality to their business.

Key numbers to watch out for are net interest income (the difference between interest earned and interest paid) and the net interest margin (the percentage of net interest income to average deposits).

Bad loans of below 1% would indicate excellent assessment of credit risk by a bank.

MANUFACTURING

Net sales figure (gross sales minus excise duties) would tell us whether a firm's products are selling fast enough.

To gauge whether the firm has pricing power, take a look at the sales per unit.

Growth in EBITDA would show whether a company is able to grow its sales faster than the rise in expenditure.

All comparisons would have to be made year-on-year

PHARMACEUTICALS

Look at geographical break-up of sales "" exports are becoming very important.

A jump in other expenses needs to be studied to see on what money is being spent.