Price lags earnings upgrade of stocks, leading to possible upside

Earnings revisions usually boost stock prices. However, many stocks have not behaved according to this expected fashion. Has that created opportunities for investors?

One of the most important factors that determine medium-term movement of stocks is earning revisions by analysts. When they downgrade expected earnings, stocks usually go down. When analysts revise the expected earnings upwards, stocks rally. Following their lacklustre September quarter results, analysts downgraded several stocks. You would expect the stock prices to underperform. But Bajaj Auto, Maruti Suzuki, United Spirits, Bharti Airtel and Idea Cellular have all bucked the trend. Similarly, analysts upgraded the expected earnings of Hero MotoCorp, ITC, Hindustan Unilever, Dabur, Reliance Industries, State Bank of India, ICICI Bank, Bank of Baroda, Larsen & Toubro, Adani Ports, Ambuja Cements, Infosys Technologies, Tata Consultancy Services, Wipro, and GAIL. Many of these stocks did not respond to the earnings upgrade.  A Morgan Stanley Research report wonders whether there is an opportunity here.

The graph below shows the relationship between earning revisions and the share prices:


The technology sector has witnessed the highest disconnect. The sector has seen improvements in earning estimates but prices have failed to reflect the same continuing a downward trend. But this downtrend could be company specific and not an overall sector trend. Three companies that have shown the widest disconnect are Wipro, TCS and Infosys, whereas HCL Technology has moved up in line with the earnings upgrade.

In complete contrast to the movement of stock prices in the technology sector, a few auto companies have defied an earnings downgrade. Joining them are companies from the telecom sector, as well.  The earnings of Bajaj Auto, Hero MotoCorp, Maruti, Bharti Airtel and Idea Cellular have all been downgraded but yet the stock prices have moved up. As for Tata Motors, despite an earnings upgrade the stock is flat. However, the stock price of Mahindra & Mahindra climbed with the earnings upgrade. As for FMCG stocks like Hindustan Unilever, ITC and Dabur, and pharma stocks like Sun Pharmaceutical, Cipla, Dr Reddy’s and Lupin, none of them had any strong reaction to the earnings upgrade.

From the banking sector, private sector banks as a whole have received an upgrade in earnings whereas for public sector banks earnings have been revised downwards. The stock prices of companies in this sector have moved more or less in line with the direction of earnings revision.

As you can see in the graphs, the disconnect between earning revisions and share prices is not a recent phenomenon, it has happened in the past as well. What could explain the reason for disconnect between revisions and share prices? The market is complicated and human evolution has not prepared us for forecasting stock prices let alone reaction to it. There could be major concerns around a particular stock or in some cases investor might have a positive macro outlook.

The simplest word to use would be that markets can sometimes (or most of the time, depending on how you see it) be irrational. Therefore, too much weight on expectations should be ignored. It is extremely difficult to forecast, at least over the immediate and short-term. If one is able to understand the fundamentals of a business model, one can perform well over the long-term, and simply ignore earnings revision, unless it is large enough to warrant an immediate decision.

So what should investors keep an eye on to profit from the irrationality? According to Morgan Stanley, investors should keep an eye on industrials and telecom. The report stated, “We would watch for sectors like Industrials and Telecoms—for the former, earnings seem to be turning up although the performance has not; while for the latter stock  performance is seeing signs of improvement, although earnings have yet to respond.”



M Ganeshan

5 years ago

Th article is a eye opener for the common investors. The stock market is very unpredictable in short term.



In Reply to M Ganeshan 5 years ago

Agree. but, the brokerages have business compulsions to draw up such predictions based on Horoscopes (charts) for encouraging people to trade.

As the legendary investor Warren Buffet said " We have long felt that the only value of stock forecasters is to make fortune-tellers look good".


In Reply to Nilesh KAMERKAR 5 years ago

Sorry for the spelling mistake, the correct spelling is Warren Buffett.

Will you really get cheaper medicines?

The government’s decision for simple average of market-based pricing for 348 drugs is simply a whitewash, according to many activists who were hoping for cost-based pricing. There may be marginal reduction in some medicine prices, but it legitimises overpricing of life saving drugs

After a delay of seven long years to decide on a comprehensive drug pricing policy, the Group of Ministers (GoM) has decided in favour of simple average Market Based Pricing (MBP) policy for price fixation of 348 essential drugs ostensibly to reduce drug prices. While drug companies may declare that it will impact their profit margins for some drugs, they must have sighed a relief that cost-based model is scrapped. MBP will legitimise overpricing of life-saving drugs.

At present, the government through the National Pharmaceutical Pricing Authority (NPPA) controls prices of 74 bulk drugs and their formulations through cost-based pricing. What happens to it? Dr Chandra M Gulhati, editor, Monthly Index of Medical Specialities (MIMS) says, “74 drugs under cost-based DPCO (Drug Price Control Order) will shift to the new policy (MBP) with substantial increase in prices.”

This new formula will fix the ceiling prices of medicines by calculating simple average of prices of brands of medicine having more than 1% share. This is a clear ploy to minimize the reduction in drug prices, to allow pharmaceutical companies to continue to charge inordinately high prices for their products. The complete divergence between the manufacturing costs of medicines and their present market prices (in case of those not presently under price control) has been widely documented.

The table below also shows that using simple average instead of weighted average (which was proposed) is hardly beneficial to patient.




Market Based Pricing   (Weighted Average)

Market Based Pricing  (Simple Average)

Cost Based  Pricing







High blood cholesterol






High Blood pressure





Source: Jan Swasthya Abhiyan

The new policy allows a leeway for 10% p.a. increase in the prices of 348 drugs. According to Dr Gulhati, “There are about 900 total medicines. The price regulation will cover 348 drugs. There will be lots of opportunity to shift from regulated to unregulated drugs. 10% increase annual increase can mean adding Rs630 crore every year to total sales.”

According to S Srinivasan, managing trustee, LOCOST (Low Cost Standard Therapeutics), “The new drug policy is simplistic, still legitimates overpricing and full of loopholes.”

It may be recalled that responding to a petition by the All India Drug Action Network (AIDAN), the Supreme Court in 2003, had directed the government to devise a policy which would ensure that essential medicines are available at costs that ordinary people can afford. Further, the Supreme Court—while hearing arguments on this writ petition—had recently opined that the government should continue to use the cost-based formula for price fixation of 348 essential drugs.

JSA (Jan Swasthya Abhiyan—Peoples Health Movement—India) contends that though policymaking is the prerogative of the executive, the Supreme Court has acted well within its constitutional mandate in directing the government to take a policy which would stop the denial of the human rights of millions of Indian people. According to JSA, “As reported in the press, the Additional Solicitor General has reportedly advised the government that it need not follow the Supreme Court’s   suggestion to follow cost-based pricing under the pretext that policy making is the executive’s prerogative.”

JSA contends that Supreme Court’s suggestion is to protect human rights of citizens and ignoring it shows the disrespect for the Supreme Court’s attempt to protect right to life enshrined in the constitution; it’s tantamount to contempt of the SC.

According to Dr Anant Phadke of JSA, “We are hoping that at the next SC hearing on 27 Nov 2012, there may be something positive that will force the Government to rethink.”

The Jan Swasthya Abhiyan demands that 

1)  The government should heed the Supreme Court’s opinion and impose price control on all 348 essential drugs and their derivatives, using the existing cost-based formula for price fixation. 

2)  All escape routes used to wriggle out of the price regulation must be plugged. Thus all dosage forms of all 348 essential medicines and all fixed dose combinations of these medicines must be brought under price-control; (all irrational fixed dose combinations should be banned.) Otherwise in practice, the price regulation would be largely nullified.

3)  The government should immediately set up a committee of experts to list crucial medicines that—a) have been left out of the current list of essential medicines and   b) have been included in the essential drug lists of states but which are not currently included in the NLEM (National List of Essential Medicines).



bhagavan p s

2 years ago

The government of India should bring out media advertisement in public interest asking the people to use Generic drugs to safe money on medicine and avoid unnecessary expenditure on brands. The irony is Indian pharma companies are exporting drugs in generic names and selling the same to Indian patients in brand names.Health Ministry is within its right to educate the people just as Petroleum ministry is with in its right to promote Industry.

Bhagavan ps

5 years ago

Well, it is not just sufficient to change the formula of pricing procedure. The drug price issue is going hay wire due to lack of regulatory provisions to control irrational and unwanted high end cosmetized formulations. India needs a NATIONAL MEDICATION POLICY under Health ministry to address the issue comprehensively from the patient end unlike the present National Drug Policy which is under Ministry of petrochemicals. Petroleum ministry is doing its job of promoting industry effectively and the Health ministry is a mute spectator at the mercy of the petroleum ministry. The national Technical Drug Advisory Board (DTAB) also needs to be revamped. Now it is a full house of doctors with MBBS + qualification who know nothing about pharmacy, Pharmaceuticals let alone pharmaceutical technology. It works purely on data and detailing delivered by the pharma companies. The Committee should have more of pharma experts, rational drug use activists and few doctors to look into the medical aspects.It is my experience that it is easier to convince a doctor technically than a pharmacist. Many a time the doctors dont show up their inability to understand and accept the promotion to cover up their ignorance. Few doctors had argued with me that what is approved by the Govt for marketing should be safe. The same doctors argued that the brand they use (expensive ones) is a reliable one and cannot trust the inexpensive ones available. patients are suffering with soaring drug prices as total issue: approval and prescribing has been left to the doctors with no control and rationale. Hope, I have driven home the issue and I look forward for a National Medication Policy and a revamped DTAB for the good of the patients.

Bhagavan ps

5 years ago

Well, the analysis is well done. But there lies a basic issue that needs to be addressed so that further build ups could go along the need and affordability basis. The pharmaceutical industry is under ministry of petrochemicals (MPC) that goes by industry biased policy decision. Crying before the Industry ministry with the problem of the common man is like crying before a tax man! Our national Drug policy is again industry biased. The focus of the industry is always on money and when it is strikes a molecule the build up of healthcare and social service coating takes place for the purpose of marketing. The National Drug Advisory Committee responsible for approval of drugs is full of MBBS doctor who know nothing about pharmacy, pharmaceuticals , let alone pharmaceutical technology. The way the irrational molecules and formulations are flooding the market and patronized by the doctors, it can hardly be believed that this committee is really going through the documents as meticulously as desired in the Act or in their own Standard Approval Procedure (SAP). Pardon me if am harsh in comparing this committee to our film censor board. You pick up any drug that has entered the market in the last 10 -15 years as a sample, almost all are having the descriptions like: Mechanism of action not fully known, safety in pregnancy, infants, children not known and some times the symptoms itself are being shown as possible side effects. How to differentiate the natural symptom from the side effect, if the drug is to be discontibued? When it comes to the dose, the manufacturer washes off his hands by just mentioning 'Use as directed by the physician' on the label. Why cant they mention standard dosage and usage on the label. How come such products with incomplete information and vague indications are getting approved, particularly in India where there is no system of counter check for the prescription? Who should correct the wrong dosage if any in the prescription? or Has it been declared and are we to believe that Indian doctors are no wrong doers?
Why not fill this committee with more number of pharma experts and rational drug use activists with few doctors only for looking into medical related issues, just as it happens in a pharma industry. It is my experience that it is easy to convince a doctor than a pharmacist!.
Coming back to National Drug Policy (NDP), what we need is a ‘National Medication Policy’ (NMP) to guide and if necessary command and dictate the pharma industry on what is needed and what is not at all needed, because, the NMP is more patient oriented where as the NDP is more industry (Money) oriented. Ex: Sugar coated Iron folic acid tablet is not manufactured as better money yielding formulations is available, but at whose cost?
Once these baselines are set right, the pricing policy definitely fall in line with the needs of the common man

Vaibhav Dhoka

5 years ago

These drug companies form CARTEL and there will be no decrease in Drug price for common MAN.

Blood Pressure Drugs for the Wrong Reasons

Don’t rush to take medicines to control moderate hypertension

Mild to moderate...

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