Mumbai: India’s key equity indices have gained about 25% in the calendar year so far to figure among the top gainers among major emerging market stocks, but brokerages and fund houses expect the earnings of Indian companies to remain subdued in the second quarter of fiscal 2013 as sluggish sales growth and higher input costs crimp margins.
Persistently high inflation and interest rates coupled with waning demand for goods and services are expected to have affected profit margins, or the actual profit earned per rupee worth of goods sold or services rendered, for the July-September quarter.
The widely tracked inflation gauge, the wholesale price index, rose 7.55% in August compared with a year earlier and from 6.9% in July, while the consumer price index rose 10.03% in August compared with a year earlier and from 9.86% in July.
“In our view, given the current macro-economic environment, big upside surprises are less likely this fiscal year,” said Sukumar Rajah, managing director and chief investment officer, Asian Equities, Franklin Templeton Investments. “The upcoming earnings season is likely to broadly mirror trends seen in the previous few quarters. Margin pressures will likely persist.”
He also said that “growth in capex (capital expenditure)/infrastructure project implementation remains on a downtrend and in that sense, earnings for the sector could remain under pressure.” Revenue growth for consumer goods companies are expected to be robust, he added.
IDFC Securities Ltd expects the earnings of Sensex companies, excluding oil and gas companies, to grow at a slower pace from the year-ago period.
“We expect Q2FY13 Sensex earnings growth (excluding oil and gas) at 15% y-o-y (year-on-year), as against comparable 19% y-o-y in Q1FY13; including oil and gas, earnings growth is expected to be muted at 6.4% versus 14.5% in Q1FY13,” the brokerage said in its earnings preview report.
It expects a year-on-year top-line growth of 13.4% for Sensex companies. This is lower than the 17% growth clocked in the previous quarter. However, the brokerage expects strong performance from companies whose businesses are not dependent on commodity prices.
“Top-line growth ex-commodities remains robust at 18% y-o-y (versus 24% in Q1FY13). Sectors like pharmaceuticals (25.7% y-o-y), information technology services (24.8% y-o-y) and financials (19% y-o-y) are expected to report strong top-line growth,” IDFC Securities said.
The brokerage expects profit margins to shrink further, but at a slower pace. “Contraction in Sensex margins is expected to come in at about 110 basis points (bps) y-o-y as against 166 basis points y-o-y contraction seen in Q1FY13,” it said. One basis point equals one-hundredth of a percentage point.
While Angel Broking Ltd has forecast a 13.3% increase in profit after tax for the companies it covers compared to a 16.1% gain in the June quarter, Edelweiss Securities expects a 14.6% revenue growth for the firms it tracks, compared to 18.3% in the June quarter and 20.9% in July-September 2011.
“Growth concerns emanating from stubborn inflation and slowing capex activity continue to persist in the near-term. The continued trend of slowing growth and elevated inflation is expected to impede corporate earnings performance to some extent in Q2FY2013 as well,” Angel Broking said in its results preview.
The brokerage expects earnings growth for Sensex companies (excluding exploration firm Oil and Natural Gas Corp. Ltd) to have improved in the second quarter of fiscal 2013 to 17.7% year-on-year, compared with 12% in the first quarter, aided by a low base for some of the large companies such as State Bank of India and Tata Steel Ltd.
“Margins for Sensex companies are expected to be lower by 180 bps y-o-y during Q2FY2013 (coverage by 120 bps y-o-y). However, on a sequential basis, pressure on margins during the quarter has eased to some extent and operating margins are expected to be flat for Sensex,” Angel Broking said in its report.
Though the benchmark equity indices have gained at least 9% in the past month, with the Sensex crossing 19,000 points for the first time in 17 months, the rally was driven by sentiments as the government pushed through its policy reforms. Earnings downgrades have continued.
“The MSCI India Earnings Revision Index, a key measure of sentiment, has been negative and on a downward trend (more downgrades than upgrades) for the last four months, indicating more downgrades than upgrades,” Religare Capital Markets Ltd said in a recent note.
According to Crisil Ratings, downgrades are likely to continue, although their severity and intensity may decline.
“Rating downgrades continued to exceed upgrades in H1 (first half) of 2012-13—there were 484 downgrades and 320 upgrades, on an expanded base of 10,542 ratings. The downgrades were driven largely by slowing demand and pressure on liquidity,” it said.
The rating agency, however, believes the worst is over in terms of corporate performance and profitability of Indian companies should improve from now.
“Corporate India’s profitability appears to have bottomed out, primarily because of softening in commodity prices. Based on an analysis of the aggregate financials of 280 large companies across 28 key sectors, Crisil estimates that EBITDA (earnings before interest, tax, depreciation and amortization) margins will improve by 20 to 40 basis points in the quarter ended September 2012,” it said.