Mr Market not buying Q2 earnings estimates, looks set to consolidate

The quarterly earnings season has begun in full swing. However, price behaviour of certain companies seems illogical. The trend of analyst expectations and comparison of results with such expectations post the actual announcement has fooled the majority.

It is presumed that analyst expectations are godsend and if those expectations are meet, then it means a company has performed well during the quarter. But the reality of Mr Market is totally different.

For example, Reliance Industries’ Q2FY19 numbers were as per analyst expectations and the company delivered a bottomline growth of 17.4 per cent YoY and topline growth of 54.5 per cent YoY on a consolidated basis. Post the result, majority of the brokerages also raised price targets for the conglomerate by 20-30 per cent. Nonetheless, the stock substantially cracked 5 per cent, immediately after the results announcement denuding analyst estimates.

TCS reported a consolidated Q2FY19 net profit of Rs 7,901 crore, up 7.6 per cent QoQ, along with a healthy Ebitda growth of 13.3% compared with that in the previous quarter. The numbers were in line, in analyst terminology. Yet, the stock fell some 12 per cent in the ensuing period. Mindtree is another such example, which fell despite a 30 per cent QoQ profit growth.

From these facts we can infer that investors should read the results without any bias by comparing the QoQ and YoY numbers. In addition, if valuations itself are very high from a historical perspective, then no matter what, the prices will fall irrespective of good numbers. There is no point giving too much attention to analyst estimates or poll numbers.

Event of the Week
Nifty faced a tumultuous week even as a number of companies announced their earnings. Banking and housing finance companies such as DCB Bank reported a 25 per cent rise in PAT, whereas Federal Bank clocked 3.15 per cent lower NIMs than 3.31 per cent report for the year-ago period. But profits were slightly better.

Indiabulls Housing Finance on the other hand reported a 21 per cent YoY increase in PAT; Crisil posted 29% YoY PAT growth and NIIT a whopping 59 per cent YoY PAT increase. Technology companies have posted strong growth this quarter mainly due to rupee depreciation, but in spite of all these, stocks have corrected and will continue to correct as valuations are still high in the IT sector.

Technical Outlook
The Nifty 50 has turned very volatile with gaps visible on the daily charts. Previous week’s hammer formation and this week’s shooting star formation indicate confusion in the market. It looks like bullish and bearish tendencies are balancing out. The market is, therefore, expected to enter the consolidation phase till expiry. Downside is capped in the 10,000- 10,100 zone on the Nifty50 and on the upside, there is resistance at 10,900.

Traders are advised not to take positions till volatility reduces to normal levels, else stop losses will have to be wider and chances of whipsaw losses are very high.

Expectations for the Week
The current phase of range-bound movement in the market is expected to continue in the following week. With the froth in some stocks beginning to be washed away, going forward we believe no new low prices will be reached, at least in the short term till expiry. However, volatility will remain high due to the macro uncertainty and rising fear of trade wars and oil price impact globally.

With the earnings season gaining momentum, it would be important to keep an eye on Asian Paints, Can Fin Homes, Bajaj Finance, Ambuja Cements, Bajaj Auto, Indigo, Kotak Bank, Bharti Airtel, Maruti, Piramal Enterprise, YES Bank, Dr Reddy’s and a few others for directional clues for the market.

The short-term mood will be mainly guided by corporate results. Therefore, investors are advised to be very selective in purchases and avoid any leverage at this juncture.

The Nifty50 ended the week 1.62 per cent lower at 10,303.