Earnings pick up in September quarter, but no turnaround yet

Broad-based earnings recovery is still at least two quarters away, say analysts

Graphic: Ahmed Raza Khan/Mint
Graphic: Ahmed Raza Khan/Mint

Mumbai: More than half the BSE-100 companies that have reported September quarter results have beaten earnings estimates, but analysts say a broad-based earnings recovery is still at least two quarters away.

A Mint analysis of quarterly earnings of 53 members of the BSE-100 index shows that 28 of them have exceeded consensus earnings estimates by Bloomberg. Similarly, 14 out of the 30 Nifty-50 firms that have reported their earnings have beaten expectations.

Contrary to what the September quarter earnings show, analysts say there are no visible green shoots of an economic revival and volume growth in sectors such as consumer staples and cement indicate subdued demand.

The earnings season has not provided any signs of an incipient economic recovery and management commentary on demand for the next two-three quarters is generally subdued, said a 1 November Kotak Institutional Equities note to clients.

Volume growth will become increasingly relevant as a driver of profits from here on as the scope for reducing costs to improve earnings is largely over, the note added.

Sharing a similar view, Motilal Oswal Securities Ltd, in a 2 November note, said the fiscal second-quarter earnings season has been in line with expectations so far on the headline numbers front, but much better on internals (earnings breadth, upgrade/downgrade ratio, surprise vs., miss ratio). Volume growth trends have been mixed.

The dismal performance of Indian information technology (IT) companies and banks, especially Axis Bank Ltd, added to the disappointment of investors.

“There were expectations that bad loan issues could bottom-out in Q2, but that has not happened. In the IT sector too, there is a lot of disruption and large-cap IT stocks could take time to gather the momentum they had earlier,” said Deepak Jasani, head of retail research at HDFC Securities Ltd. The poor volume growth reported by packaged consumer goods companies indicates that rural spending has not yet picked up despite normal monsoon rainfall, he added.

Another point of concern is whether companies will be able to sustain their profitability at the levels seen in the quarter ended 30 September. Some analysts say that a surge in global commodity prices will limit further expansion of operating margins even as the benefits of low input prices from inventory acquired at lower cost is likely to fade away soon.

“One of the highlights of this result season is that some sectors have shown margin expansion on the back of lower commodity prices which is not sustainable going forward, so margins will not stay at these levels,” said Vaibhav Agrawal, head of research at Angel Broking Ltd.

But how deeply rising input costs will dent profitability will be known after December quarter earnings, analysts said. Companies may have to resort to price hikes if raw material prices rise substantially.

Meanwhile, the wait by investors for the positive impact of a normal monsoon and seventh pay commission payouts to reflect on companies’ performance has got a bit longer.

“We will have to wait for one or two more quarters to see signs of rural spending revival and its impact on economic growth,” Jasani said.

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