Watch out for 'results reactive' stocks

Scrips such as Bharat Heavy Electricals, Motherson Sumi, Bank of Baroda, and Hindalco saw the biggest swing after their Q1 results

Stock broker looking at screen outside the Bombay Stock Exchange

The earnings season is again taking a grip on D-Street. And, the Street is yet to see major earnings-reactive stock price movements.

There were 10 stocks which saw heavy share price swings of plus or minus five per cent on a single day in reaction to their quarterly results in the past two quarters at least. Among them are Tata Motors, Hindalco, Tata Steel, Bharat Heavy Electricals, Motherson Sumi, Bank of Baroda, Adani Ports and Idea Cellular, all closely tracked by market participants – analysts, traders, institutional investors and investors.

While these stocks represent diverse sectors, the common thread is they're seen as barometers of India’s industrial growth. Many of these are also sector leaders or barometers. So, a major reaction in these stocks does influence others in their sectors.

“Companies closer to the Indian economy are those which also have large trade volumes,” says B Gopkumar, chief executive officer, Reliance Securities. “So, when these stocks disappoint or do well in terms of earnings, it is reflected in their stock prices. Stocks like (information technology majors) TCS and Infosys are not representative of the economy. While automobile stocks or those of auto components, banking and financial services are sectors which mirror the 7.5 per cent growth of the economy.\"

G Chokkalingam, managing director, Equinomics Research, feels as deflationary pressure due to subdued commodity prices and its resulting impact on demand and consumer sentiment are easing globally, and in India, investors would also watch if the trend is reflecting in earnings. “Investors would like to see if there is any significant return in demand, whether on the industrial or consumer side in the coming quarters, and these stocks will effectively reflect the trends,” he adds.

Experts expect this to continue in the September quarter results for stocks such as Adani Ports, Motherson Sumi and Hindalco. While their results are expected to be good, given the low-base effect, these stocks might remain volatile. Investors will gauge if the positive effort by these companies in the earlier quarter and/or improvement at the macro level are yielding results in line with the expectation.

An analyst with a domestic brokerage, who closely tracks these stocks in the derivatives segment, asks investors to exercise caution in these counters in the futures and options market, closer to their results. “These stocks either end up making a lot of money or huge losses (for traders) during the earnings season,” he warns.

In fact, in the past six months, beta (measure of volatility) has risen sharply for most of these; it is now over one. A count of one or above indicates high market volatility as compared to the benchmark index (the Sensex in this case). Idea Cellular, while at 0.72, has risen from 0.5 in March.

Another expert suggests a slightly safer way to trade in volatile stocks closer to the results would be to buy call/put options, where any downside is restricted to the option premium paid by the trader.