Mumbai: The fourth quarter (Q4) earnings announcement season kicked off on Wednesday on a strong note and equities rebounded spectacularly from their intraday lows, though brokerages are expecting yet another rough quarter that will likely keep the stock markets on tenterhooks.
India’s largest power generation company NTPC Ltd said its net profit for the January-March quarter of fiscal 2009 was up 29.85% over its level a year ago. But just about nobody expects these results to be a harbinger for similar positive announcements by most other companies.
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Estimates put out by brokerages suggest that corporate earnings in Q4 will decline on a year-on-year basis, for the third straight quarter.
“There seems to be a lot of dispersion in earnings growth forecasts across sectors and stocks,” said investment bank Morgan Stanley in its earnings preview report. “Combined with the election uncertainty, this appears to be a recipe for volatility on the bourses.”
While a few analysts and economists believe that the worst is over for Indian companies, they are reluctant to call it a recovery. They prefer to wait for the first quarter of the fiscal 2010.
“Chances are that we will see a bottoming out in Q2 (of calendar year 2009) and that recovery should start in Q3 and Q4. Beyond that there are several uncertainties, both global and domestic,” Jahangir Aziz, chief economist at the Indian unit of JPMorgan Chase and Co. told Mint in an interview last week.
Hopes of a revival in economic activity is one reason why Indian equities have rallied in the past four weeks to their highest levels in 2009. “While the core story of lowering interest rates, improving financing conditions and bottoming out of demand slowdown is intact, we believe that at least in the near term the prices have run ahead of fundamentals,” said Apurva Shah of Prabhudas Lilladher Pvt. Ltd in a 6 April report.
The bellwether index of the Bombay Stock Exchange (BSE), the Sensex, closed at 10,742.34 on Wednesday, gaining 570 points from the day’s low, as investors rushed to buy stocks at cheaper levels. Since 9 March, the 30-stock benchmark index has rallied 31.64%, the best among emerging markets.
The Sensex had lost 52% in 2008 after returning at least 45% in 2006 and 2007.
Besides continuing economic uncertainty and weak earnings, politics could also weigh down equities. The general election for India’s Parliament will start next week and a new government will be in place by end-May.
Most brokerages attribute the decline in corporate earnings to foreign currency losses and higher interest burden on the firms. “Companies will have suffered lots of foreign currency losses,” said Harindra Kumar, head of research at Centrum Broking Pvt. Ltd. “Interest burden, too, would have gone up as many had to take on debt at higher rates.”
The collapse of Wall Street investment bank Lehman Brothers Holdings Inc. in mid-September plunged the global financial system into a severe credit crunch, making money scarce and costly. The October-December quarter financials of Indian companies did not catch the full impact of the crisis and there is a consensus among brokerages that the earnings slowdown will continue.
“Generally, everything slowed after October,” said Rashesh Shah, chief executive officer of Edelweiss Capital Ltd. “Sales have gone down and commodity prices have also declined.”
“Though the implementation of AS-11 (Accounting Standard 11) has been deferred to 2011, we believe Indian corporates face a high risk of MTM (mark-to-market) losses,” said brokerage Religare Hichens Harrison in its earnings preview report.
It has flagged Reliance Communications Ltd, Punj Lloyd Ltd, Bharat Forge Ltd, JSW Steel Ltd and Tata Motors Ltd as the ones most likely to suffer such losses. MTM is an accounting practice of valuing an asset in accordance with its current price and not the price at which it was bought.
AS-11 is an accounting standard that requires companies to mark their foreign exchange gains or losses to market prices and charge this to the profit or loss account. The standard, which was supposed to have been introduced this fiscal year, will now be introduced in 2011. The rupee depreciated 23% against the dollar in the last fiscal year.
Centrum Broking forecasts a 13% decline in the earnings of the companies it tracks.
Motilal Oswal Financial Services Ltd sounds more bearish, even though in its earning preview report, it wrote “…we could be at the end of the earnings downgrade cycle”. It forecasts a 19.3% decline in the earnings of the companies it tracks, excluding oil firms.
Typically brokerages track between 100 and 150 top listed firms among the pack of BSE-500, which make up for at least 90% of India’s market capitalization.
Religare Hichens Harrison predicts a 9% decline in net profit for the 30 companies that make up the Sensex.
This is a continuation of the trend from the past two quarters when collective earnings of the BSE-500 companies posted a decline in profit after tax, for the first time in at least 12 quarters.
In the quarter ended December, BSE-500 companies reported a 13% decline in net profit, following a close to 25% reduction a quarter ago. There has not been any drop in net sales of these companies as yet. While most sectors are expected to report an earnings decline, metals and real estate are likely to be the most hit due to lower product prices and higher interest rates.
No recovery yet
Despite an increase in sales in sectors such as automobiles and cement in the January-March quarter, analysts and economists remain sceptical about calling it a recovery.
“Some economically significant sectors such as cement, steel and automobiles did report improvement in the demand conditions in Q4 after a dismal Q3. However, the sustainability of the same remains suspect, since some of this is linked to pre-election spending,” said Prabhudas Lilladher. “Also, with interest rates remaining firm, the investment demand appears unlikely to improve anytime soon.”
The Indian central bank has cut the key policy rate substantially from 9% to 4.5% since October to bring down the cost of money and pared banks’ cash reserve ratio, or the portion of deposits that commercial banks need to keep with the Reserve bank of India, to improve liquidity, but many feel that the impact of these will kick in only in the current fiscal year. Indeed there is optimism, but analysts have still questions on the sustainability of the increase in demand in certain pockets.
“Outlook for the quarters to come continues to be less bleak as lower inflation and interest rates are expected to reduce the burden on consumers and corporates alike,” said Angel Broking Ltd. Most brokerages expect companies to report flat earnings growth in the current fiscal 2009-10.
Graphics by Ahmed Raza Khan / Mint
Ashwin Ramarathinam contributed to this story.