Mumbai: Analysts expect the coming earnings season to be business-as-usual, with good, but not outstanding growth in both revenue and earnings (or profit) that would result in no change in how the market rates the stocks of companies.
If, however, earnings grow at a lower-than-anticipated rate, the market could see some re-rating—downward.
Earnings season kicks off next week—on 13 July—when Infosys Technologies Ltd, one of India’s largest software services firms by revenue, and a bellwether for the equity markets, declares its results for the April-June quarter, the first quarter of 2010-11 for most Indian companies whose financial year ends on 31 March.
According to analysts, earnings of the Sensex companies will grow by 16-20% for the quarter, over the corresponding quarter of the previous year, on the back of economic growth, and the resulting increase in sales.
That number marks a slowing from the 22% at which the Sensex companies grew their earnings in the January-March quarter (over the January-March quarter of last year).
“We expect 17-18% growth in aggregate earnings of Sensex companies,” said Raamdeo Agrawal, joint managing director of Motilal Oswal Financial Services Ltd. Thirty stocks constitute the Sensex, India’s bellwether equity index. Earnings growth is easing, said a 25 June note of Citigroup Global Markets, estimating that Sensex companies (excluding oil firms) will report a profit growth of 16.2%.
Profits for 3,867 listed companies grew 15% in the previous quarter, ending March, over the year-ago period. The Sensex companies’ 22% rise in net profit in that quarter was a nine-quarter high while their revenue grew 35%, the best in at least 20 quarters.
Just as in the previous two quarters, automobile firms and information technology companies are likely to lead growth. In the quarter ended March, Hero Honda Motors Ltd posted a 49% gain in profits while Maruti Suzuki India Ltd’s profits grew by 170%.
Stronger domestic consumption also means that consumer goods companies are expected to perform relatively well, said analysts.
The oil and gas sector, which is subjected to crude price volatility, and the telecom sector, where companies are facing a bruising price war, are the sectors likely to receive earnings downgrades, said Motilal Oswal’s Agrawal.
In the last quarter, Bharti Airtel Ltd’s profits saw a small rise of 2.6% (over the corresponding quarter of previous year) while rival Reliance Communication Ltd’s net profit dropped 77%.
Revenue growth, helped by inflationary pressures in some instances, is the likely driver for earnings growth in this quarter, said analysts. “Overall sales growth should remain high—32% ex-oil, and 19% ex-metals, but this is lower than in the previous quarter (and in a more inflationary one),” wrote Aditya Narain and Jitender Tokas of Citi in their report. Though inflation remains a key risk to earnings growth, economic indicators remain strong in the world’s second fastest growing major economy. A more successful than expected telecom spectrum auction and partial deregulation of oil prices is likely to ease the government’s fiscal deficit. Manufacturing, too, has put up a strong show in recent months with factory output registering a 17.6% rise (over the corresponding month last year) in April.
“Sales growth should be better this quarter, but margins might be affected because the advantage of low-cost inventory (raw materials), which was available in the December and March quarters would not have been available this time around”, said Deepak Jasani, head of research at HDFC Securities Ltd. “A rise in prices in the last quarter could have a lagged impact this quarter,” he added.
Prices of key industrial inputs such as steel, aluminium and rubber have increased in the last fiscal year, although they softened in the quarter ended June due to the turmoil in Europe and fears of overheating in China, the largest consumer of many commodities. Indeed, analysts are divided on the impact of volatile commodity prices with most companies tying up supplies using forward contracts as a hedge against volatility.
Both R. Sreesankar, head of research at Tata Securities Ltd and Harindra Kumar, head of institutional broking and global research at Elara Capital Plc said that companies would have taken advantage of the softer raw material prices in the quarter. The former estimates earnings to grow at least 20% this quarter.
Still, there are unlikely to be major earnings upgrades in the quarter that will boost market, momentum. This could be a major let-down for the market which had expected some sort of fillip from the earnings season. Despite foreign institutional investors buying some $6.3 billion (Rs29,421 crore) worth of Indian stocks this year, the Sensex has traded in the range of 15,790.93 to 17,970.02 this year. “I see no major upgrades in earnings from any of the large sectors post the current quarter,” said Girish Pai, head of research at Centrum Capital Ltd. “We are cautious on the markets and have been so for a while, largely based on the view that the growth we have seen in the past few quarters has been driven by fiscal and monetary stimulus both in India as well as globally,” he added.
Conversely, in an environment of global uncertainty replete with Europe’s debt woes and some overheating in the Chinese economy, a lower than expected earnings might cause the equities market to react adversely. The Reserve Bank of India’s monetary policy tightening will also have an adverse impact on the equity market. The central bank has raised its key policy rates by a quarter percentage point thrice this year, and may go for another increase in end-July to fight the rising inflation.
While the market might have already priced in the positive steps towards fiscal consolidation, it might not have factored in the slowing in earnings growth, wrote Clive McDonnel, Ryan Tsai and Gautam Mehta in a 21 June note from BNP Paribas Corporate and Investment Banking, downgrading India to underweight.
The report notes that the earnings revision index, which had peaked at 1.6 in October 2009, has come down to 0.2 in May and “is at risk of turning negative”.
This means that while there were 2.6 companies receiving earnings upgrades for every company receiving a downgrade earlier, that number has slipped to 1.2 by May and is expected to decline further. Still, adjusting for currency fluctuations, India has performed better than most other major markets, gaining 2.5% since January. In comparison, China fell 21.5% while the US fell 2%.
Ashwin Ramarathinam contributed to this story.