MUMBAI: While Covid-19 hurt most businesses with many seeing a sharp decline in profit, and logging losses in June quarter, a few of them have bucked the trend and some turned into the black.
Analysts say these turnaround stories can perform well in the market the long run, as long as they continue the earnings momentum.
An analysis of BSE-500 stocks that have announced June quarter earnings showed eight companies have managed to be back in the black despite Covid-19 impacting most businesses across the globe. What is pertinent to note is that none of these stocks fall in the large-cap category.
They include IDFC First Bank, IDBI Bank. EID. Parry (India), The Great Eastern Shipping Company Ltd, Shipping Corporation Of India, Jindal Steel & Power, Hathway Cable & Datacom and Chennai Petroleum Corporation.
While these stocks have returned to churning out profits amid testing times, analysts said the future of these stocks would depend on their ability to sustain the earnings growth.
“These stocks are better off than so many other penny stocks, which have witnessed exuberance,” said independent analyst Ambareesh Baliga.
“They have to potential to outperform the other midcaps and smallcap stocks if they continue with this kind of earnings performance,” he said.
Three of these stocks – EID Parry, Shipping Corp and IDFC First Bank — have registered a decline for the year to date, while IDBI Bank was the among the top gainers with 85 per cent rise for the year to date.
Lender IDBI Bank reported second successive net profit after 13 consecutive quarters of loss. It logged a net profit of Rs 144 crore on account of a reversal of Rs 1,335 crore in bad loan provisions against a loss of Rs 3,801 crore in the year ago period.
The stock has been riding a wave of optimism as the lender reported profits for the second quarter in a row, but there has been skepticism that the rally may have peaked.
Peer IDFC First Bank saw net profit rise to Rs 93.5 crore at the end of June compared with a Rs 617 crore loss reported for the same period last year., helped by higher treasury gains and net interest margins (NIMs) and lower operating expenditure.
“June quarter performance indicated sustained transition towards the stated policy of ‘retailisation’ -running down wholesale book, focus on granular deposits, etc,” Edelweiss analysts said in a note on July 29, while maintaining a hold rating on the stock.
Murugappa group’s sugar and nutraceuticals company EID Parry (India) posted a standalone net profit of Rs 226 crore for the first quarter ended June, against a loss of Rs 53 crore in the year-earlier period, due to better realisation and cost-cutting measures.
IndianOil unit Chennai Petroleum Corporation reported standalone net profits at Rs 271.63 crore for the quarter, compared with a standalone net loss at Rs 233.41 crore during the corresponding quarter of the previous financial year, due to significant jump in gross refining margins (GRMs).
Average gross refining margin for Q1 FY21 was at $11.94/bbl as against $1.41/ bbl in Q1 FY20 due to better cracks.
“Considering the strategic importance of CPCL’s refinery in the southern India, expansion plan and strong promoter back ground, we believe the financial performance to improve in the medium to long term,” Kotak Securities said in a note on July 28, while recommending an “add” rating on the stock.
Reliance Industries-backed Hathway Cable and Datacom reported a consolidated net profit of Rs 66 crore in the June quarter, against a net loss of Rs 9 crore in the same quarter a year ago.
Jindal Steel & Power reported a net profit of Rs 267.58 crore for the quarter, compared with a net loss of Rs 87.40 crore for the corresponding period a year ago.
The power and energy company reported its highest ever consolidated EBITDA of Rs 2,384 crore, logging a year-on-year jump of 10 per cent.
In note on August 4, Edelweiss maintained its ‘buy’ rating on the stock.
“We are upbeat on JSPL for many reasons: superior volume growth vis-a-vis peers, lower cost structure owing to utilization of the Sarda iron ore fines. the only company in the sector that street expects to deliver earnings growth in FY21, and sustained efforts on deleveraging,” Edelweiss analysts said.
For state-run Shipping Corporation of India and Great Eastern Shipping Co, Covid-19 oddly, turned out to be a blessing in disguise. The company reported a stand-alone net profit of Rs 317.48 crore in the April-June quarter, its highest in 54 quarters as tanker earnings jumped after oil refiners and traders rushed for crude oil tankers for storage on the high seas, sending the rates higher.
Higher tanker rates also propelled Great Eastern Shipping’s profits to the highest since September 2008. The shipping company registered a net profit of Rs 468 crore compared to a loss of 53.96 crore for the same period last year.
The stock of the company rose 20.69 per cent to Rs 272.65 after its AGM. The company pointed out that its cash reserves are more than the market valuation of the company, suggesting low valuations.
“Coming to the financial results for the first quarter of FY 2021, we had an extremely profitable quarter. In fact, the most profitable quarter since the September 2008 quarter, which was just before the start of the global financial crisis,” Great Eastern CFO G Shivakumar told analysts in a post-earnings call.
“This quarter was, of course, helped by huge turmoil around the pandemic and which resulted in tanker rates spiking to levels not seen before, at least not in the last 20 years. And therefore, very strong earnings on the tankers,” he added.
Gaurav Dua, senior vice-president and head of capital market strategy & investments at Sharekhan by BNP Paribas stressed that an investor needs to understand the reason for the turnaround, and ensure that it is not just an aberration. “It is all about sustainability of profit growth,” said Dua. “In some cases, such as shipping companies. there are one-off instances of gains, while in cases such as EID Parry, the profits are sustainable because of the turnaround in the sugar sector,” he said.