Strong earnings have helped D-Street to skyrocket to fresh record highs in the last two months and stocks which rose in anticipation of good earnings in the small & midcap space delivered over 100 percent net profit growth.

The June quarter earnings were largely in-line with expectations boosted by low base due to demonetization and GST, but experts are building a case for earnings recovery which could well play over next two quarters.

For the first quarter, earnings were led by consumption and commodity companies, with metals and oil & gas accounting for more than 100 percent of the incremental earnings growth, suggest experts.

Within the consumption pack, auto lagged with a broad-based miss on profits and consequent earnings downgrades.

“The Q1FY19 net profits of the Nifty50 index grew 12.3 percent which was 2 percent above our estimates due to lower losses of certain PSU banks. We model 20% growth in net profits of the Nifty-50 index for FY19 (down from 23% before 1QFY19 results season) and 24% for FY20,” Kotak Institutional Equities said in a note.

"However, valuations are heady and macro weak and faces growing risks from a large number of global issues. We note that 2-year growth numbers (CAGR) are quite mediocre, raising concerns about the strength and sustainability of the ongoing economic recovery, which is led by consumption demand. On the other hand, the Indian banking NPLs seem to be peaking and resolutions moving ahead a good sign,” it said.

Strong earnings have helped D-Street to skyrocket to fresh record highs in the last two months and stocks which rose in anticipation of good earnings in the small & midcap space delivered over 100 percent net profit growth.

Stocks in the small & midcap space which have already more than doubled investor wealth in 2018 gave stellar results in June quarter where net profit grew by more than 100 percent. The list includes names like Dolat Investments, Graphite India, Mangalam Organics, Nelco, Excel Industries, India Glycols, Merck, Muthoot Capital, Jubilant FoodWorks, and L&T Technology Services, according to data compiled by AceEquity.

Data suggests that top stocks when filtered from highest to lowest returns flagged these 10 stocks in which net profit grew by over 100 percent on a year-on-year basis. Are these top buys? Well, maybe not, at current levels, say experts.

Most of the brokerage houses do not have a coverage on these stocks while some feel that it is best not to add fresh positions at current levels.

“Among the 10 stocks which have more than doubled investor wealth in the last one year we wouldn’t recommend a strong buy on any as some of these are cyclical stocks which will reverse when their cycle turns, while a few are fundamentally weak or are just rising with the tide,” Jimeet Modi, Founder at Samco Securities.

“Higher valuations in a few also do not support investing in these stocks at this point in time. As these stocks would provide a low margin of safety and would be high-risk plays, it would be advisable to look for other safer opportunities which have performed consistently in the past and have adequate safety in this highly volatile market and have corrected decently,” he said.

Can we see a double-digit growth by FY19-20?

If you are eyeing a double-digit earnings growth by FY19-20 then it looks plausible, but experts feel that investors should take the recovery with a pinch of salt.

Some of the large-cap companies which beat analyst estimates were TCS, Wipro, M&M, Grasim, Hindustan Unilever, Ultratech, Indian Oil, BPCL Reliance, HDFC, Sun Pharma, ONGC, while HCL Tech, Tech Mahindra posted inline numbers.

“The result announced during the June Quarter have been more or less in line with Sharekhan expectation. While some misses were SBI, ICICI Bank, Tata Motors, Maruti (marginal disappointment on margin side),” Hemang Jani, Head - Advisory, Sharekhan by BNP Paribas.

“Sensex earnings are set to record a 14-16% CAGR in the coming two years. This itself is quite encouraging and will provide some cushion to equity markets,” he said.

Cumulative effects of demonetization and GST have played out strongly in the June quarter and the healthy numbers are proof. But, some experts feel that market has already discounted the good news and the growth for the remaining quarters in this fiscal year could be muted.

“We have seen a recovery in auto, FMCG or even some housing finance companies all have given a robust top-line growth which has led to the index touching new highs. Due to GST’s low base from the last year, exceptional growth has been reported by a few large players in the FMCG space,” said Modi of Samco Securities.

“Giants such as HUL and Nestle have given Rs 175 crore to the govt’s consumer welfare fund as they failed to pass the benefit of GST to the consumers and probably that could be the reason for robust numbers. This indicates that the double-digit growth is an aberration and not here to stay. Markets have already discounted these factors but the growth for the remaining quarters in this fiscal year can be muted compared to this quarter which the market has not discounted,” he added.

Here is a list of stocks which investors can look at post Q1 results:

Analyst: Mustafa Nadeem, CEO, Epic Research.

The double-digit growth continues to be there though in a scenario with stretched valuations we expect leaders to continue to perform well. We expect this to continue in coming quarters and see double-digit growth in sectors like financials, Pvt banks, cement, and construction space.

Voltas: Target: Rs 702, RBL Bank: Target 665, Ultratech Cement: Target: Rs 4700, NCC: Target Rs 135, and India Cements: Target Rs 140.

Analyst: Hemang Jani, Head - Advisory, Sharekhan by BNP Paribas

TCS, Mahindra & Mahindra, Dabur India, Escorts & Bajaj Finserv are some of the ideas from our stable which are looking good from an investment perspective.

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Disclaimer:- The views and investment tips expressed by investment experts are their own. Ripples Advisory advises users to check with certified experts before taking any investment decisions.