Mumbai: For the first time in 25 quarters, or at least five-six years, Indian companies will show a year-on-year decline in profits for the three months ended December, according to estimates by brokerages.
The fall, which the brokerages put in the double digits, comes after three successive quarters of slowing profit growth.
The brokerages added that the coming bad news has already been factored into stock prices. “Sharp earnings decline is a given and there will be continuous downgrades, however, these are already priced in the current valuations,” said Ashutosh Datar, an analyst at online brokerage India Infoline Ltd. The third quarter earnings season will begin on 13 January when software services firm and sector and stock market bellwether Infosys Technologies Ltd announced its results for the three months ended December.
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“Expect sharp earnings decline,” said Manishi Raychaudhuri, India head of equity research for BNP Paribas Securities India Pvt. Ltd, the local arm of the French financial services group, in his 5 January India Strategy report.
“We believe that the near-term earnings risk has been adequately factored in by the market,” said analysts Vinod Nair and Bandish Mehta of local brokerage Religare Hichens Harrison, in a results preview report released on 2 January.
Most brokerages attribute the decline to the collapse in the commodity market and the slowdown in demand.
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Still, at least some brokerages expect the decline in profits to result in a fall in the stock market.
“We expect Sensex to repeatedly go across 9,000 as politics and corporate India’s loss recognition negate policy easing and economic data improvement in first half of 2009,” said Monday’s India Strategy report from Credit Suisse Securities (India) Pvt. Ltd.
Sensex, the 30-stock benchmark index of the Bombay Stock Exchange, fell 25% in the three months ended 31 December and around 52% in 2008 after returning at least 45% in 2006 and 2007. The index closed at 10,276 on Monday, up 317.38 points or 3.19%, mirroring a relief rally in global markets and responding to Friday’s developments when the Reserve Bank of India cut its policy rate yet again and the government unveiled a second so-called stimulus package to revive a slowing economy.
According to the 2009 strategy report by IIFL, the institutional research team at India Infoline, the “market will look for growth cues beyond the next two-three quarters”.
Most brokerages project a significant fall in earnings.
Prabhudas Lilladher Pvt. Ltd predicts a 14.3% decline in the earnings of the companies it tracks, excluding banks. Motilal Oswal Financial Services Ltd forecasts 11.2% decline in the earnings of the companies it tracks and a 5.8% decline in the profits of the 30 companies that are part of the Sensex.
“Corporate earnings will continue to deteriorate in the coming quarters,” said brokerage Sharekhan Ltd in its earnings preview report.
The Religare report said that, “excluding banks and oil and gas (sectors), earnings before interest, taxes, depreciation and amortization (Ebitda) margin is expected to contract by 173 basis points year-on-year, while the profit after tax, or PAT, margin will drop by 158 basis points.” One basis point is a hundredth of a percentage point.
The BNP Paribas report was more bearish, predicting a 300 basis points decline in both Ebitda and PAT.
Ebitda is a measure of operating profit.
Commodities, autos worst hit
Brokerages expect the decline in profits to be the sharpest for auto and commodity firms. Religare estimates a 59% decline in the profits of auto companies and 40% in oil and gas companies. The Prabhudas report forecasts a 116.5% decline in the profits of steel companies and 53% decline for auto companies.
“Commodities and autos could provide the biggest negative surprise,” Raychaudhuri of BNP said in his report.
The fall in global metals prices by 40-60% in the quarter has led to complete reversal in the fortunes of metal companies, said Angel Broking Ltd in its earnings preview report.
Companies carrying significant inventory will also suffer from having to account for the lower prices of their products.
“Aside from margin contraction, the inventory write-down will be something to watch out for, particularly for Reliance (Industries Ltd),” said an executive of a foreign fund who asked not to be named because he isn’t allowed to speak to the media.
Mint reported on 7 December that RIL had reduced prices of at least 10 petrochemical products in the preceding two months. Reliance has an at least 14% weightage in the Sensex.
“This might be the worst quarter for a long time to come,” said Sandeep Sabharwal, chief investment officer at JM Financial Asset Management Pvt. Ltd.
Graphics by Ahmed Raza Khan / Mint
Ravi Krishnan and Ashwin Ramarathinam contributed to this story.