Simply Put: Earnings seasonality

Friends Harish and Shakti meet over a cup of coffee amid the season’s first rains, and soon the topic drifts from weather to seasonality in earnings.

Harish: The harsh Summer seems to be behind us. Let’s look forward to a pleasant year ahead. The earnings season is also starting for financial analysts, hope that is fine too.

Shakti: More than earnings season, I am focused on seasonality in earnings, which I guess will be starker.

Harish: Wow, gyan time already! Please explain more on seasonality in earnings and why it will be starker.

Shakti: Seasonality in earnings is nothing but volatility in earnings, which is periodic in nature, influenced by external factors and not based on the company management or its performance.

Take the first half of any calendar year (from January to June), for example, which includes a few of the hottest months in the year. This is the period which will deliver the highest revenues for companies selling cooling products – ACs, refrigerators or coolers. Voltas, the consumer durables company, generated roughly 33 per cent/31 per cent of its yearly revenues in the last three years in each of these two seasonally big quarters. More importantly, operating leverage plays out. Since a good part of the costs are fixed in nature, these quarters constitute 40 per cent/38 per cent of annual profits. In simple words, these two quarters when combined, account for around 80 per cent of annual profits.

Owing to overbearing impact, this year’s results are keenly awaited. As has been experienced so far, this has been a starkly hotter Summer. The investors are expecting record-breaking sales numbers from companies, and valuations factor this in. In a few days, we would get to see if they have met/exceeded or failed expectations.

Havells has reported decent growth in Q1FY27 with 19 per cent year-on-year sales growth. But the company doubled its advertising spending, which led to 15 per cent decline in PAT. It remains to be seen how investors react to the mixed results.

Harish: Such levels of concentration doesn’t seem healthy.

Shakti: Concentration is never good. But some industries can avoid it, some industries cannot. Take consumer durables, for instance — building a portfolio of TVs, entertainment systems, display solutions... anything non-cooling-based is a safe diversification. Even institutional business that is cooling-based is good. Also, take seed and crop protection companies. These companies are dependent on sowing seasons and monsoons, and are concentrated. But a diversification in terms of end-user – rice, sugar, wheat or cash crops can deliver a diversified base. That is why LG Electronics or PI Industries get a premium compared to peers, as they have developed a relatively-diversified base.

Then there are steel and cement companies. Construction activity halts during monsoon and the earnings of these companies will also dip and such seasonality cannot be avoided. Also, these companies along with those related to infrastructure, roads and railways face yet another form of seasonality – elections-related. Whenever there are elections — State or Central, government spending takes a backseat. Predicting or managing this seasonality is also difficult.

Harish: You seem to have covered it well, but missed a crucial point. While infra-activity stocks take a hit from elections, media companies experience a high. That is why as investors one should be diversified even if the company is diversified or not.

Shakti: Oh, looks like the cooling temperatures are rekindling your grey cells!