Stock
markets have declined in excess of 30% due to Coronavirus stock market crash in
India and world over. Bluechip stocks like HDFCBANK have also fell more than
30% that is an expectancy of EPS coming down by same percentage points.
Everyone must be wondering regarding what to do after crash in stock market
due to COVID-19. This piece would also look into what’s in store for stock
market investors in near future and if and how to take benefit of
Coronavirus stock market crash. In our new articles we will also discuss about what stocks to buy post Coronavirus market crash and when to buy.
Let’s analyse this purely on
maths. Suppose, the companies‘ have to shut operations due to Coronavirus
effects for one quarter i.e. 3 months; in that case the sales and profits
will decline by a quarter of what they are on annual basis. Take example of
HDFC BANK; say it is clocking growth of 40% annually then this number will decline
by 10% and the new annual growth rate will be 30%, so according to this
calculation the PE should decline by 10% and not 30-50% which has been
happening with most shares.
Also, unlike recessionary
situation, the companies will save on many variable costs like electricity,
transports etc. depending upon the nature of the business of the firm. These
will cut down on operating expenses side offsetting some of the erosion on the
profitability side.
The government will also
provide tax benefit and other soaps for most sectors of the economy that
are likely to be affected due to novel COVID-19 virus crisis and lockdown post
its spread.
Some assumptions:
This analysis assumes the
nationwide lockdown to be of 3 months or less.
I also assumed that the
growth of companies is evenly distributed over 4 quarters.
EPS/PAT does not have direct
perfect correlation with Sales as many operating factors could influence it
y-o-y in different magnitude.
Investors use PE, EPS and
market price of the stock as prime factors of importance while considering
investment.
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