Stocks to watch: In times of tax gain, these 72 firms grew Q2 PAT on top line expansion

This was one of the better earnings seasons anytime in last 3-4 years, says Vivek Mavani.

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Data available with Ace Equity on November 6 showed 71 firms listed on BSE as largecap, midcap or smallcap reported over 100 per cent rise in net profit in Q2.
One-off deferred tax gain supported bottom lines for much of India Inc during the September quarter. But that should not take away credit from those which managed to grow bottom lines on the strength of top line expansion.

September quarter earnings season broadly turned out to be better than expected, which took BSE benchmark Sensex to its record high mark. Sensex scaled a fresh all-time high of 40,676 amid the ongoing earnings season.

This was one of the better earnings seasons anytime in last three or four years, says Vivek Mavani, Independent Investment Adviser.


“A number of companies have beaten Street expectations. I am evening out the earnings growth because of the tax adjustments which a lot of companies have done because we had the tax cuts in the middle of the quarter. A lot of companies adjusted that in the second quarter,” he said.

For instance, despite a drop in top line, Tata Steel reported a 6 per cent increase in consolidated net for the quarter at Rs 3,302 crore, thanks to the new tax regime.

JSW Steel posted 22 per cent rise in consolidated net profit, mainly due to a writeback of deferred taxes and accrued incentives from previous years. But the company’s revenue from operations actually declined 18.5 per cent to Rs 17,572 crore from Rs 21,552 crore a year ago.
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But Mavani also points out that going by pre-tax profit or Ebitda number, a large number of companies also managed to grow on their own, actually showing margin expansions that beat Street expectations.

Data available with Ace Equity on November 6 showed 71 firms listed on BSE as largecap, midcap or smallcap reported over 100 per cent rise in net profit in Q2.

Even some of them like Dr Reddy’s Lab reported over 100 per cent expansion in net profit despite a 25 per cent rise in Q2 revenue. Others like SBI reported manifold rise in bottom line due to a partial stake sale in its life insurance business.

SBI posted nearly six-fold rise in consolidated net profit for the quarter, supported by a partial stake sale in its life insurance business.
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Bottomline of the public sector lender grew 485 per cent to Rs 3,375 crore in Q2FY20 from Rs 576 crore in the same period last year. Gujarat Gas, GSK Pharma, Indian Bank, Jindal Saw, NIIT, JK Tyre, Deepak Nitrite, Motilal Oswal Finanical Services, Bank of Maharasthtra and Avani Feeds were among other major players that reported over 100 per cent profit growth in Q2.

Earnings Table 1 - 100%

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Besides one-time tax gains, other income, improving asset quality and corporate-related actions supported bottom lines of select companies during the quarter.

Motilal Oswal Financial Services reported 3,297 per cent profit growth at Rs 142.3 crore in September quarter against a Rs 4.5 crore in the year-ago period, while Indian Bank reported Rs 359 crore profit on increasing income and improving asset quality by controlling loan slippages and other factors, a top bank official said.

A sharp drop in provisions for loan writeoffs in the home finance arm during the quarter supported the bottom line of the Mumbai-based firm.

Vinod Nair, Head of Research, Geojit Financial Services, said a strong momentum was seen in the market is due to healthy Q2 earnings from big corporates. “This positivity is likely to stay in the short to medium term as concerns of the market are fading with tax cut,” he said.

Out of top 71, five players reported over 100 per cent sales growth, 25 others posted 10 to 70 per cent increase sales. Others reported up to 10 per cent rise or fall in net sales during the quarter.

Some 73 firms from across sectors such as consumer food, TV broadcasting, banking, NBFC, plastic products, power generation and engineering, among others, reported 50 to 100 per cent bottom line expansion.

The list included players like Multi Commodity Exchange, Bandhan Bank, SRF, GTPL Hathaway, Kukuyo Camlin, Varun Beverages, EIH, Petronet LNG, PSP Projects, Torrent Power, Asian Paints, Berger Paints, UltraTech Cement and Aarti Drugs.

Earnings Table 2 - 50-100%

“Corporate earnings have been subdued or below expectations over the past few years. However, we are starting to see a revival in corporate earnings growth, and expect it to pick up pace from H2FY20. This will help to drive the markets going forward,” said Sampath Reddy, Chief Investment Officer, Bajaj Allianz Life Insurance.

He said the recent corporate tax cut would provide a boost to corporate earnings over time. “We believe a bottom-up research-oriented process, coupled with growth at reasonable price (GARP) approach will help deliver superior returns over the long term,” he said.
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