Four times a year, Indian companies publish their quarterly results, and the market’s mood can change within days. Prices react to profit growth, margin trends, management commentary and guidance. Active participants hunting for intraday stocks for today often use results announcements as catalysts for sharp moves, while investors building long term stock picks view the same season as a checkpoint on business health. The same information is interpreted differently depending on your time horizon, and understanding this difference can improve your decisions.
What Happens During Results Season
Companies must publish their financial results to their stock exchange within specific timeframes after the end of each quarter. Typically, large companies will release results in waves over a period of weeks. Usually, tech services and banking companies will be first, followed by manufacturing, consumer and others.
Analysts will look at results vs. estimates. More often than not, it’s not how good the results are, but whether they are above or below expectations. A company might have a strong set of results but not meet the high market expectations and still go down. Or alternatively, they might not have a great set of results but beat low expectations and cause a rally.
Short Term
Results can be volatile and exciting for traders. Volumes will be very high, there could be large gaps at the open, and the range will be larger. Whilst this can be exciting, there is more risk involved. Prices can quickly reverse once the initial reaction has been seen and people start to take on board comments from management.
It can be risky to be in a position around the results as gaps can occur overnight and skip your stop loss. Most traders will like to wait until the initial reaction has been seen and will trade in the direction that has been confirmed. Usually you will want to reduce your position size.
Long Term
Long-term investors will look past one quarter. Often results can be skewed by seasonal factors, one-off profits and short-term costs. Investors will look at whether the underlying franchise is improving. They will look at trends over multiple quarters, increasing order books, market share, return ratios and cashflow.
If the quarter was poor due to short term factors such as late deliveries or abnormal weather, this could be seen as an opportunity as the long term story is still intact. However if the quarter was positive due to one off income, this should not be confused with sustainable improvements.
Key Metrics
Revenue growth shows that there is strong demand but make sure to see whether this is due to increased volumes, price increases or acquisitions. Operating margin shows pricing power and control of costs. Net profit can be skewed by other income, tax adjustments or exceptional items so ensure the quality of earnings.
Banks will want to look at net interest margin, gross and net NPA’s, credit growth and provisioning. Tech Services will want to look at constant currency growth, deals won and staff turnover. Manufacturing will want to look at capacity utilisation, order book and raw material costs. Knowing what metrics are important to each industry will help you understand the results.
Management Comments
Numbers tell you what has happened but the comments will give you insight into why and what is coming up. Listen out for guidance on demand, margins, capex and debt. Are they consistent quarter on quarter? Or do they keep moving the goalposts? Usually an honest admission of challenges will be a better sign.
Earnings call transcripts are readily available and often provide extra insights that you wouldn’t get from the press release. For example customer concentration, pricing pressure or regulatory risk.
Common Mistakes
A common mistake is looking at the headline profit and not reading the notes. Another is thinking that if the price goes up after a good set of results it will continue to go up. Often markets will price in expectations ahead of results.
Investors shouldn’t go big on any one stock ahead of results. The outcome is very uncertain and even if your analysis is correct you could get an unexpected reaction from the price.
Using the Season to Your Advantage
Make a simple template for each company you are following. Note down any key metrics, compare them to last quarter and last year, note any guidance from management and add a quick summary. After a few seasons you will notice patterns and become more knowledgeable.
