Mumbai: The Indian stock market reacted adversely to the Union Budget, with analysts, investors and traders claiming that they found nothing in the finance Bill to enthuse them, and they are likely to be disappointed by the coming earnings season too, going by reports from top brokerages.
Click here to watch video
For the quarter for which the results will be announced—the three months ended June, the first quarter of the fiscal year for most Indian companies that close their books of account in March—the brokerages expect a further dip in profit, the second consecutive quarter of a decline in earnings. And the three successive quarters before that had seen slowing profit growth.
With the first quarter (2009-10) performance “expected to be weak year-on-year (y-o-y), we see a risk of price correction”, said a 2 July report from brokerage Religare Hichens Harrison Plc. “Stock prices for real estate, metals, auto, capital goods and infrastructure (companies) have run ahead of fundamentals.”
Between 1 January and 3 July, the Sensex—the benchmark index of the Bombay Stock Exchange—gained 54.58%. Since the Budget was announced on 6 July, it has lost 7.75% till end of trading on Thursday, but is still 42.6% higher than its 1 January level.
Analysts predict that the markets will now turn to fundamentals such as corporate earnings and other cues such as monsoon and global economic factors.
“We have to get through the global cycle,” said Sanjay Sachdev, country manager and regional fund manager (South-East Asia) at Tokyo-based Shinsei Bank Ltd. “The monsoons will also have an impact.”
Hopes of an early economic turnaround in India and, to a lesser extent, the world have lost traction. On Thursday, G-8—a Group of Eight developed countries—said the global economy still remained fragile. Monsoon rainfall in India for the week ended 8 July were 8% below normal, said the India Meteorological Department on Thursday. A weak monsoon could affect crop patterns and consequently hit rural demand in a country where at least two in three people depend on agriculture for their livelihood.
The weeks ahead will also see companies declaring their results for the June quarter. Although some firms, including IndusInd Bank Ltd and Gammon Infrastructure Projects Ltd, have already declared their results, the show really begins on Friday when software services company and stock market bellwether Infosys Technologies Ltd announces its results.
Worst over, but things are still bad
“The March quarter may have marked a bottom for earnings growth,” said a 2 July earnings preview report by Morgan Stanley India Co. Pvt Ltd’s Ridham Desai and Sheela Rathi. The report added that earnings may continue to decline y-o-y for the quarter ended June and the following quarter. Morgan Stanley expects revenue to fall 7% and profits by 2% for the 95 companies it covers.
The weeks ahead will also see companies declaring their results for the June quarter. Sandeep Bhatnagar / Mint
Religare Hichens Harrison has forecast a 4% fall in aggregate revenue for the 30 companies that make up the Sensex, India’s most widely tracked equity index, and a 9.7% decline in their profit after tax.
Angel Broking Ltd said it expects the “net sales of Sensex companies to decline by about 4% y-o-y and net profit to register a de-growth (decline) of 12% y-o-y.”
The brokerage added that it expects the operating profit margin (a key measure of profitability, this is simply a company’s profit from operations expressed as a percentage of its revenue) for these companies to fall by 120 basis points. One basis point is one-hundredth of a percentage point.
Metals, real estate will be worst hit
Brokerages expect the sharpest decline in profits of companies in the metals and real estate businesses.
Motilal Oswal Financial Services Ltd said it expects a 60% decline in profit for companies in the metals business and a 67% fall for real estate firms.
Centrum Broking Ltd said it expects a 74% fall in the profit of real estate firms and a 35% fall for companies in the metals business.
Companies in the metals business were hit hard by falling prices as demand shrunk, analysts said. At the same time, they had to scale back production to get rid of inventory, resulting in a fall in both revenue and profit.
However, companies in businesses such as cement, auto, banking and energy are expected to show better numbers on the back of the government’s fiscal stimulus packages announced earlier this year that offered tax breaks and pushed spending.
Now, wait for next year
While most brokerages claim the worst is over, they have played it safe by predicting a better 2010-11, and not a better second half of 2009-10.
“The stimulus packages and low interest rates will help unleash the huge latent domestic demand in India going forward,” said the note from Angel Broking. “Aided by this and coupled with lower input costs and debt/cost of debt rationalization, we believe that India Inc. will deliver a considerably improved performance in FY2011.”
Motilal Oswal said the “commissioning of a large number of mega projects coupled with recovery in global and domestic economy will mark a repetition of the strong earnings growth trend and upgrades starting FY11”.