The earnings season is around the corner. A slew of good macro reports suggest a strong recovery. At the same time, the macro numbers track production and not profits, and the base effect is not as pronounced as it was during the December quarter. It’s also true that with the price-earnings multiple being already stretched, higher stock prices now depend on better-than-expected earnings.
So what kind of earnings growth is expected for the March quarter? The Centre for Monitoring Indian Economy (CMIE) estimates that sales growth will be robust, at 20.8% year-on-year (y-o-y). Unfortunately, though, net profit for the CMIE sample of companies is expected to fall by 2.9% y-o-y. But this will be mainly due to the poor performance of the petroleum products sector. Oil-marketing companies are not being compensated for the 78% y-o-y rise in crude oil prices, nor are they allowed to pass on the rise in prices to consumers. CMIE expects the net profit of this sector to plunge by 85% from a year ago in the March quarter.
How much of the drop in profits is due to the oil companies? CMIE predicts that the manufacturing sector (excluding refineries) profit will rise by 64.6% y-o-y in the March quarter. Including refineries, profit for the manufacturing sector as a whole will decline by 20.6%.
Also, “other income” growth will be lower because many companies had reversed their forex losses for the preceding three quarters in the March 2009 quarter following relaxations in accounting rules.
Graphic: Yogesh Kumar/Mint
For 2010-11, CMIE estimates that sales growth will be 18.4%, compared with 4.8% in 2009-10. Both rising volumes and higher realizations will boost sales. Net profit growth, however, is expected to be a tepid 11% in 2010-11, primarily because the prices of most commodities will rise and firms will be able to pass this on only partially to the consumer. The manufacturing sector will be the laggard, with net profit expected to grow by just 6.2% in 2010-11, while net profit of the non-financial services sector is expected to grow by 22.2% and that of the banking sector by 20%.
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