BackEarnings seen continuing poor show in March quarter
Quarterly financial statements are expected to disappoint investors betting on a revival in earnings growth
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Mumbai: Indian companies that will report quarterly financial statements later this month are expected to disappoint investors betting on a revival in earnings growth, as locally focused firms continue to struggle with weak demand and unfavourable currency movements hit exporters.
Edelweiss Financial Services Ltd estimates profit after tax and sales of the 30 members that constitute the BSE Sensex to decline by around 7% each from a year earlier, while Kotak Institutional Equities expects profit to rise by 0.1% and sales to grow by 0.2%.
“Apart from sector-specific issues, the decline in commodity prices and cross-currency headwinds are key factors that have hurt earnings growth in the March quarter for companies at large," Sanjeev Prasad, senior executive director and co-head of Kotak Institutional Equities, said in a phone interview. “A significant recovery in earnings is some time away, and we don’t know how far that is. It will be at least three quarters before we see an uptick in the underlying economic environment."
Factory output growth in Asia’s third-largest economy eased to 2.6% in January compared with an upwardly revised 3.2% in December, pointing to a dull operating environment for companies. Adding to this, export-oriented sectors, which until recently were reporting strong earnings growth, are also likely to face the heat due to cross-currency woes.
“The last quarter of FY15 has been a perfect storm resulting in a broad-based slowdown. The second consecutive quarter of INR (rupee) appreciation relative to EUR (euro) and other emerging markets is expected to dent earnings of export-oriented sectors, viz., IT (information technology) and pharma," Edelweiss Financial said in a note on Monday.
The expected weakness in earnings in the fourth quarter of the financial year will add to worries after companies reported poor earnings in the preceding quarter. Net sales for Sensex-30 companies declined 1.81% in the quarter ended 31 December—their first such drop in 15 quarters—while net profit dropped 5.8%, their worst performance in six quarters, according to data from Bloomberg.
It is unclear whether the March quarter will turn out to be better or worse than the December quarter.
“Extremely weak rural demand, high corporate real rates and contraction in government spending are expected to weigh on domestic consumption and investment-oriented sectors," Edelweiss said in the note.
“The only solace for corporate India is lower input prices, which would provide some cushion to the bottomline," Edelweiss analysts said.
While earnings growth is yet to pick up, abundant market liquidity and strong inflows drove the market to record highs in the March quarter.
The 30-share Sensex had tested a record high of 30,024.74 points on 4 March. It gained 1.67% in the March quarter, backed by foreign fund inflows of $12.9 billion.
Since then, indices have given up some of their gains, even though the Sensex closed 0.67% higher at 28,707.75 points on Wednesday.
Still, market valuations are expensive, according to some analysts.
“Valuations are very expensive. We haven’t downgraded our estimates as yet, but might do it in some time. What is supporting the market and flows is a combination of global macro factors. Central banks are printing a lot of money. There is a lot of money and that has to go somewhere," said Prasad of Kotak.
“Yields are low elsewhere. In that sense, India looks decent from a long-term perspective, and is attracting good flows," added Prasad.
Sensex trades at 16.04 times one-year forward earnings, moving closer to its five-year average of 15.66 times, according to Bloomberg estimates. Still, it trades at a 28.2% premium to MSCI EM Index which is trading at 12.51 times one-year forward earnings.
R. Sreesankar, head of institutional equities at Prabhudas Lilladher Pvt. Ltd, said the brokerage has already downgraded earnings estimates for Sensex companies by 3.5% in the year ended 31 March. While the market is expensive relative to its 10-year average, valuations may remain stretched as long as global liquidity conditions remain supportive.
“Price-earnings multiple is not borne out by earnings growth alone. It is out of liquidity scenario, which is currently abundant. Within the EM (emerging markets) space, India is still better off in terms of prospects of economic growth, and hence is attracting huge flows," said Sreesankar.
Export-oriented software companies are likely to see muted earnings growth in the March quarter.
“Q4FY15 results from Indian IT services players are likely to reflect continued cross-currency pressure, the usual delays in project ramp-up at the beginning of the calendar year and challenges related to weather patterns in North America," IDFC Securities said in a note on 28 March.
According to IDFC analysts Hitesh Shah and Abhishek Gupta, major global currencies have depreciated by 4-10% against the dollar during the quarter and this will hit sequential dollar revenue growth of the top five IT firms by an estimated 200-250 basis points.
UBS expects weak asset quality trends to persist for financial companies
“While slippages could remain at level seen in Q3FY15, restructuring is expected to be slightly higher given this quarter being the last quarter of regulatory forbearance," UBS analysts said in a note on 27 March, adding that it expects large private banks—HDFC Bank Ltd and Axis Bank Ltd—to report higher loan growth at more than 20%.
Kotak Securities expects a good quarter for auto companies. The brokerage expects auto companies to report a 160 basis points year-on-year improvement in Ebitda (earnings before interest, taxes, depreciation and amortization) margin, aided by the positive impact of currency movement and a richer product mix.
For consumer goods, Edelweiss expects demand growth trends in the March quarter to be similar to the December quarter, but gross margins of most companies are expected to expand, driven by benign commodity prices and price hikes.
Edelweiss expects engineering and capital goods firms under its coverage to post flat revenue growth as investment activity remains weak.
Profit growth for these firms is estimated to decline by around 7%.
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