With a full-blown credit crunch starting from September, corporate results in the quarter to December are expected to be awful, mirroring the sharp deterioration in macroeconomic data. Earnings are being revised downward at a rapid pace.
Increasingly, analysts are warning that earnings may actually contract. In its market outlook attached to a study on wealth creation, brokerage Motilal Oswal Securities Ltd points out that despite low interest rates, the Sensex index is trading close to its historically low past 12-month price-earnings multiple, which suggests that the market is anticipating a sharp fall in future corporate earnings.
The report goes on to say, “We see distinct possibility of earnings decline over the next two years, contrary to consensus estimates.”
Note that only a month or so ago, the firm had estimated Sensex earnings to grow at 16.9% in FY10, although if the contribution from Reliance Industries Ltd’s new businesses is left out, EPS (earnings per share) growth for the year ending March 2010 was estimated at just 6%.
The broker had expected at the time that the Sensex companies will show EPS growth of 3.4% in the second half of the current fiscal year.
Also See Return to the Mean? (Graphic)
Other brokerages too had been optimistic—at the end of November, the title for a Citigroup Inc. report on its Indian equity strategy was, “Earnings growth 0%—Not yet”.
The serious deterioration in the finances of Indian companies this quarter—rating agency CARE, for instance, had 14 downgrades in November versus only one upgrade—has led to fresh pessimism about the outlook for corporate earnings.
The last time Sensex profit after tax growth turned negative was in the September 1999 quarter, when it fell by 9.64%, compared with a year ago.
At that time, growth in the Index of Industrial Production (IIP) was 4.1%.
This time, with IIP growth already having turned negative, the forecasts of declining earnings now seem quite probable.
Incidentally, Motilal Oswal has an interesting metric of India’s corporate profit to GDP percentage.
This had reached a high of 6.4% in FY08, far above the mean of 3.3%. The brokerage estimates it to fall to 6% in the fiscal year ending March 2009. Note, however, that it was at 2.1% in FY01, at the time of the post-dot-com downturn, while it was as low as 1.8% in FY99, at the time of the Asian crisis and the last credit crunch.
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