Covid effect on financial results
We are in the midst of the financial result season. Results reported so far have been weak and consequently the share prices. This article explains that current results need to be assessed from the Covid impact angle also.
EPS growth is a very important driver for share price movement. Meaningful acceleration in EPS gives strong clue for expected EPS growth and share price movement over the next 6-12 months. Investors typically focus on EPS growth in QOQ (current result over the previous quarter) and YOY (current results over last year same period) time frames. Let’s consider results for Jubilant Foodworks (JUBI) and Hindustan Unilever (HUL), which have reported results. The chart shows six quarterly results and PE valuation on respective result dates. For JUBI, the QOQ and YOY EPS growth looks healthy at 66 percent and 60 percent. For HUL, QOQ and YoY growth was 17 percent and 6 percent. Yet, both these shares have declined by 7-10 percent over the past 10 days. Let’s delve deeper.
JUBI’s current EPS of `9.17 is even lesser than December 2020 EPS. Forward growth expectations based just on the recent four quarters will be very poor, possibly sub-10 percent. June 2020 was affected by the Covid business shutdown and as such this data point cannot be used to undergrowth trends. Let’s now focus on its PE valuation. PE ratio for the company was a huge 205 times in June 2020, a very high number perhaps because its earnings had collapsed due to shutdown and PE ratio rose to compensate. Progressively, as results normalised, the PE ratio has come down to the current 115 times. This is very high as generally companies with high PE show healthy 25 percent+ growth. As this stock is owned by several institutions, the price may not correct too much immediately, but it is easy to see that share price appreciation from here will need much stronger EPS growth.
HUL has reported similar EPS over the past three quarters, with no growth. This company benefitted from the Covid shutdown as consumers purchased its products heavily as it was one of the few essential businesses allowed to operate. Consequently, June and September 2020 EPS were very strong. In this context, even small growth would have been meaningful. Before the result announcement, its share price rose in anticipation of a better result. However, the reported growth came flat, explaining the price movement. Even so, given that valuation is in historic range, this could be a buying opportunity in HUL, should growth revive. In the next, we examine how historic valuation ratios can be used beneficially by investors.
Badri Narayanan (badri@equitylevers.com)
Equity investor and Founder, Equitylevers Finance Lab