How Polycab Beat Havells to Win the Valuation Game
quarterly numbers, business channels flash the following details. 'Company misses analyst estimates.' 'Company beats analyst estimates.' As an analyst, I have always wondered, shouldn't it be the other way round? Isn't it the analyst who misses or beats company results and not the company? After all, it was the analyst who estimated the quarterly numbers based on his assumptions. Why should the company be missing or beating estimates? The dilemma for a lot of investors is what to do after a sharp reaction of a stock to its results.
I believe, investment calls should not be taken based on one quarterly result. However, a change in the trend of a stock's price happens quite often after quarterly results. For instance, let's take two stocks from the same industry which reported numbers recently.
Polycab India: Superb numbers and management commentary. Havells India: Subdued numbers and management commentary. Polycab reported very strong numbers for the quarter with a 42% rise in revenues and an 80% jump in profits.
The stock reaction was sharp with a 10% upper circuit on the next day. The stock jumped 30% over the next 3-4 days. Havells reported subdued numbers with a 14% growth in revenues.
Its EBITDA margins contracted from 8.5% to 8.3% on an annual basis. In contrast to the 80% jump in profits of Polycab, along with 2.8% YoY margin expansion, Havells' numbers were pedestrian to say the least. The stock price of Havells fell 6% after the results.
The question is, how do you take a call on such results? There is something most people don't talk about when analysing stocks. The concept of relative valuations. Take the example of Polycab and Havells.
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