February 2020 was a difficult month for market participants as the Nifty50 fell 6.4%, as global markets experienced even steeper falls than that largely due to the news regarding the spread of the coronavirus from China to various countries around the globe. In India, the stock market has been somewhat subdued through most of the year and what were meagre gains for the Nifty50 till a month back, has turned into negative territory for the performance for the current financial year.
Now that most of the results of the companies for the December 2019 quarter are in, we thought it would be a good idea to review the results over recent quarters to gauge how the economy is doing. We looked at a data set of all companies currently in the BSE500 index excluding the banks and financial services companies and looked at the growth in their revenue and profit before tax (the recent corporate tax cut has changed the tax payable for some companies) over the last several quarters. We find that the median company in this data set was growing its revenues in the mid teens (13.1%, 15.7% and 14.6% during Jun-18, Sep-18 and Dec-18 quarters respectively). However due to the increased stress in the economy resulting from tighter liquidity for NBFCs post the ILFS crisis, numbers have deteriorated significantly. While the median company’s revenue growth declined to 10.0% in Mar-19 and thereon it has been sliding every quarter to 6.8% in Jun-19, 3.8% in Sep-19 and now finally to 2.5% in the Dec-19 quarter.
The profit before tax (PBT) growth for the same data set shows a similar trend. The median PBT growth was 18.4%, 16.6% and 20.8% in Jun-18, Sep-18 and Dec-18 quarters but this had declined to 3.1% in June-19 and the median growth rate for Sep-19 and Dec-19 is a negative 0.2% and a negative 0.6% respectively. This is a matter of concern for us as observers of the economy because the last time that we got such bad corporate results was during the 2008 crisis when although the aggregate numbers observed over the worst 3 quarters were worse than those observed during Sep-Dec 2019, the median growth numbers were a lot better than in the current cycle.
As one can see from the above data, the economy is in the grip of a severe slowdown and the situation is further compounded by the spread of the coronavirus (many observers are beginning to use the word pandemic in association with it) because that is likely to have a severe impact on the supply chains globally, including India. In an environment like this, where growth in the Indian market is hard to come by, we are happy to note that many of the companies in our portfolio, particularly the large holdings in the portfolio, are companies that are gaining market share from their competitors and thus are able to report at least some reasonably good growth even in this environment. Moreover, with lower tax rates, earning growth for these companies is well ahead of operating profit growth. In the mean time while fear grips the market, as seems to be the case with the coronavirus scare globally, there are bound to be drawdowns in the portfolio, which are part and parcel of long term investing, which we all need to get used to. Eventually the coronavirus scare should also blow away – it is hard to predict when but we are hopeful that human ingenuity will be able to surmount the issue. Though many stocks have fallen sharply, investors would be wise to have a good idea about the intrinsic value of the businesses that they own because we sure are in the middle of a storm.