LESSONS FOR THE EARNINGS SEASON

By Ruma Dubey

Quarter-on-Quarter (QoQ) or Year-on-Year (YoY)? That is always the moot question during earning season.

Financial performance is all about comparison but which is the scale that one is supposed to use? Should we look at sequential numbers – Q3 and Q4 of the same fiscal or should we look at Q4 of this fiscal and corresponding Q4 of previous fiscal.

We often come across this question from our readers, putting us a query that when they looked at the performance sequentially, the numbers looked extraordinary but when compared YoY, they looked dismal. So what was 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 Q4 is not good for current Q4. 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. 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.

Now take the case of a company like, say, Shopper’s Stop. For Q4FY17, which is the period from Jan to March, when sales are much tepid compared to Q3 period from October to December, income fell 10%.  Here, it makes no sense to compare QoQ, as seasonally Q4 is weaker and there were no ‘sales’ as such. Thus where festive demand or seasonal sales come in, it is the thumb rule to 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 Q3 numbers with Q2. 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 is at its 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. Take the case of Yes Bank – for Q4FY17, its net profit was up 30% (YoY) at Rs.914 crore and NII rose 32% to Rs.1640 crore. Advances showed a 35% growth and deposits rose 28%. Yet, the stock was butchered on the streets as its asset quality sequentially dipped - its Gross NPA jumped up to 1.56% from 0.85% (QoQ) and Net NPA rose from 0.29% to 0.81%. Its provisions for bad loans rose almost three times to Rs.310 crore.

Actually the stock market teaches us all the lessons – if the stock is in red despite great YoY numbers, see deeper and you will learn why and vice versa. These YoY and QoQ are barometers for us to take a long term and short term call respectively.  QoQ reflects near-term pressures and its ability to achieve long term, YoY estimates.