The fourth quarter results season for financial year 2018 – 19 (Q4FY19) has been a mixed bag. While on one hand companies such as Hindustan Unilever (HUL) Hindustan Unilever, the country’s largest consumer goods company, reported its lowest volume growth in six quarters during the recently concluded quarter on the back of moderation in rural demand, Tata Consultancy Services (TCS) reported better-than-expected 2.4 per cent growth in constant currency (CC) revenue in Q4FY19.
A quick analysis of companies that have announced results thus far (till May 6) reveals that 16 companies on the BSE, which includes Sterlite Technologies, Deepak Nitrite, LIC Housing Finance and Can Fin Homes have registered a consistent rise in their operating profit since the past four quarters in Q4FY19. Bandhan Bank, Federal Bank, Aavas Financiers and RBL Bank are among ones in the financial sector to have achieved this feat during the period under review, shows ACE Equity data. (See table below)
“Bandhan posted a solid 4QFY19 performance, with stable asset quality (gross NPAs flat q-q) coupled strong AUM growth, pick-up in margins and improvement in liability franchise. With over 50 per cent move since February 2019, we believe valuations are now close to fair levels.
Hence, we downgrade the stock to Neutral at a raised target price to Rs 625,” wrote Adarsh Parasrampuria, Amit Nanavati and Tanuj Kyal of Nomura in a post results note.
Adding: “Our new target price of Rs 625 (earlier Rs 570) implies 25x FY21F EPS (earlier 23x) and 5.4x FY21F book (earlier 5x). Bandhan’s solid profitability implies premium to larger retail banks reflected in the +5x book multiple we ascribe (vs 3.4-3.8x book multiple for HDFCB/Kotak), however in our opinion, current multiples do not factor-in potential binary risk outcomes in the MFI business.”
Importance of operating profit
Operating profits are important because it is an indirect measure of efficiency. Simply put, higher the operating profit, the more profitable a company's core business is.
From an accounting perspective, operating profit serves as an indicator of the business’s potential profitability with all extraneous factors removed from calculation. All expenses that are necessary to keep the business running are included, which is why operating profit does take into account asset-related depreciation and amortisation, which are accounting tools that result from a firm's operations.