Food inflation for the week ended 19 February, released on Thursday, may have declined marginally, but inflationary pressures are still very much real for Indian companies. With a majority being unable to pass through costs to customers, margins are getting tighter and broker downgrades are now heavily exceeding upgrades.
Also See | Inflation Worries (PDF)
Look no further than the HSBC Markit purchasing managers’ indices. Input price increases for the service index grew the fastest in 31 months. It was worse for manufacturing firms as their raw material cost increase rose to a five-year high.
What’s more, commodity prices are showing no signs of easing, at least in the near future. Brent crude is trading around $115 (Rs5,175) per barrel, as Libya see-saws between peace proposals and a civil war. But it’s not only crude that is rising. The Thomson Reuters/CRB Jefferies Index, a basket of agricultural and industrial commodity futures, has gained one-fifth since November.
Consequently, earnings revisions have started in right earnest, especially after the December quarter numbers came in. In the three months ended December, more companies disappointed Street estimates than those surprised on the upside. And invariably, it was due to shrinking margins.
Religare Capital Markets Ltd reckons that the IBES (institutional brokers’ estimate system) India Earnings Revision Index has declined the most since the global slowdown. BNP Paribas Securities Asia is looking at a 2-3% decline in its fiscal 2012 estimates for the Sensex. Ambit Capital Pvt. Ltd has upgraded earnings estimates for eight companies against 31 downgrades. The brokerage covers about 70 companies. Similarly, Citigroup Inc.’s upgrade/downgrade ratio is 26/38.
True, these earnings downgrades are not spread across sectors. The sectors that lack pricing power—such as cement and consumer goods—are most vulnerable to a margin squeeze and declining earnings, according to broker estimates. Rising inflation is only one part of the story. It is also leading to a concomitant rise in interest rates, which spells further trouble for another set of firms in real estate and construction. As BNP Paribas points out, these firms also suffer from a poor track record of executing projects that will put them under more pressure.
The bottom line? If the third quarter wasn’t bad enough, the last quarter of the current fiscal could be worse.
Graphics By Sandeep Bhatnagar/Mint
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