EARNINGS – SEQUENTIAL OR ANNUAL?

The earnings season has started and once again, we face the same dilemma while analyzing the performance - Quarter-on-Quarter (QoQ) or Year-on-Year (YoY)? Should we look at sequential numbers – Q2 and Q1 of the same fiscal or should we look at Q2 of this fiscal and corresponding Q2 of previous fiscal?  

And sometimes, there is no straight, forthright answer to that. Sometimes when you look at the performance sequentially, the numbers looked extraordinary but when compared YoY, they looked dismal. So, what is the right barometer?

The answer is inextricably linked with the cyclical or seasonal nature of the company. For example, lets look at the IT sector. This is a sector which is always measured QoQ as it is a sector which is ever evolving, dynamic; what was good for last fiscal Q2 is not good for current Q2. The entire analysis of TCS based on its Q4 performance, whether it is good for the long term or not is based on its sequential analysis. To turn the very same conclusion around, YoY the indication is that FY22 is looking much better – now that’s a long term view but for the short term, QoQ, numbers have improved, meaning within the year, the company is improving every quarter. Once again in sectors like IT and Telecom, there is no seasonality as such; the exchange rate YoY varies widely, skewing the picture. In both these sectors, even the addition of employees and increase in number of subscribers in case of telecom companies is compared QoQ as it indicates whether the company is growing in the short term or contracting.

For an automobile company, it is pointless comparing QoQ as it is a pure seasonal stock – H2 is always the best time for this sector due to the festive seasons and farmers harvest money coming in, which see’s maximum sales. Q1 is usually the weakest in that sense as there are no major festivals and rural India is sowing crops. Thus it would make no sense to compare a lean period to a robust season and hence auto sector is always YoY.

The thumb rule – when festive demand or seasonal sales come in, always use YoY comparison. These companies, like consumer durables, FMCGs, shopping malls, automobiles, jewellery, make the most during the festive season; Q3 for these companies, period between October to December would be the best. And that’s why it makes more sense to compare these sectors, YoY.

So, then what about power, infra, steel, cement, the core sectors? These are necessarily compared YoY as all these sectors are prone to cyclical and seasonal fluctuations. Like demand for cement is weakest during monsoon, so would make no sense to compare Q1 numbers with Q4. Or in case of power, the demand is maximum in summer and lowest in winter, so once again, best to compare summer numbers with summer and winter with winter.  And then there are agri stocks – here rabi and kharif, sowing and harvest decides. Thus fertilizers, pesticides, seeds, all agrochemicals and basically all agricultural products demand are at their best during monsoon – Q2 and Q3 are the best; so you can compare YoY only.

The rule here is very simple – all sectors which are cyclical and seasonal, use YoY and the rest, which are steadier, where the sector itself decides its own demand or supply, use QoQ. This will include the likes of ‘defensive’ stocks like beverages, medicines, food, alcohol, cigarettes and education. These are largely recession proof and hence do not move with the business cycles.

Banking is one sector, which needs to see a mix of both, YoY as well as QoQ. When it comes to profitability, YoY comparison of net profit or net interest income is best. But when we have to analyse asset quality – NPAs, provisions, slippages, take a cursory look at YoY numbers but what really determines the quality are the sequential numbers.

Actually, the stock market teaches us all the lessons and as rightly said by Peter Lynch, one of the greatest mutual fund manager of all-time, “Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what is actually happening to the companies in which you've invested.”