Usually, when sanity prevailed, once a company posts dismal earnings, the most logical reaction would be a fall in the stock price as most would rush to sell. But the exact reverse seems to be the working mode in the markets.
Today, Bharat Forge has staunchly held its position among the top three gainers on the BSE; in fact it rose so close to the 15% UC of the day that many were sure it would be frozen. This seeming “gold rush” to buy into Bharat Forge is despite the company, for Q1FY21, posting a net loss of Rs.56 crore v/s profit of Rs.174 crore (YoY). This loss was on a 68% drop in revenue at Rs.427 crore.
So why is it among the gainers? Most brokerage houses believe that from here with demand revival, it will see an uptick. In short, they estimate that the worst is over. CLSA put out a “buy” and raised target price from Rs.325 to Rs.535. 12 brokerage houses in all have put out notes stating that they are very bullish on the stock.
Lemon Tree Hotel too is similar. The company for the first quarter posted a 71% (YoY) drop in consolidated revenue at Rs.41 crore and net loss was at Rs.42 crore. But the stock has a got a “buy” from various brokerages because it posted a positive EBITDA, has got onto various cost cutting measures, got capital infusion- all this while agreeing that they do not expect to see any significant improvement before FY22. The stock is perched on the top five gainers list on the BSE since opening bell today.
The story is the same for Ashok Leyland. It ended Q1FY21 with a consolidated net loss of Rs.389 crore v/s profit of Rs.275 crore (YoY). The loss saga began right at the topline, which dropped by a huge 77% at Rs.1486 crore. A deferred tax write-back of Rs.157 crore helped shore up the loss or else it would have been higher.
On the other hand, Aurobindo Pharma is among the top losers on the BSE since morning despite having posted a 23% (YoY) jump in consolidated net profit at Rs.781 crore on a 9% rise in revenue at Rs.5924 crore. These earnings in fact beat the estimates of almost all brokerage houses. So, the logic for this? Most confer that the price had gone up way beyond the fundamentals and they recommend re-entry on dips.
Now this is really puzzling; when a company posts a loss, its outlook is bright because the worst is over and when a company posts a profit, it’s a “sell” because its price has run way ahead of its worth? What does this mean? The market today is all about the future only, everything in Q1 is already discounted for? Is that how recommendations are made today and is that how we also need to look at stock prices?
More than fundamentals, it looks like it is brokerage houses which call the shots, putting out ‘notes’ which decides the fate of the stock that day. They are essentially the movers and shakers on the market, which is why the question comes to mind - how much relevance should an investor like me and you give to such rating downgrades/upgrades by brokerage houses? Yes, we do need to pay heed to the concerns being evinced by these brokerage houses as they do an extensive research on the companies and have a very close ear to the ground. Many a times, they get a whiff of things much ahead of others.
There are many who argue that these brokerage houses have vested interests in putting out these reports. Many allege that when they want to sell, the brokerage houses put out “buy” calls and the exact opposite when they want to buy. They trap investors when they want to get out.
But these are not small time brokerage houses that we are talking about. They are of international repute and could not have reached this far without being fair. So, to pooh-pooh their reports completely would be naïve and not very smart just as believing that they do not have any vested interest would be.
Yet, one needs to also question – are they always right? As traders, maybe one might need to act as quickly as possible but as investors, one should look at the reasons for the upgrade and downgrade and if there is no monumental, long term impact, they stay invested. Remember, what they “sell” today becomes a “buy” later. Thus one needs to understand the relevance of the reasons and then take an intelligent decision.
Maybe if you have conviction in a stock, say like Infosys or Reliance, when the rating downgrade pushes the stock price down, it could be the best time to actually go contrarian and buy.
At the end of the day, it is our decision entirely about how much importance we give to these reports. Brokerages houses, be it domestic or international, are ultimately about making money and all their actions will be about maximizing their returns. We too need to do the same and stop being a cow in the herd.