How bad is the current earnings downturn compared with previous ones? The last time the world economy went into recession and India’s growth slowed substantially was in 2001. Before that, a combination of the impact of the Asian crisis and a credit crunch at home sent growth plummeting in the late 1990s. But so far this year, corporate profit growth has been well above the level in those downturns.
In order to check whether the current profit downturn is already worse than during the earlier periods, we compared the results of all listed firms in the Capitaline database (leaving out the oil companies because their losses skew the picture) in the September quarter with the results of all listed firms seven years ago, in the September 2001 quarter, during the depths of the previous downturn that followed the bursting of the dotcom bubble.
The results are eye-opening. All listed firms (ex-oil) posted an average net profit growth of 8.09% in the September quarter compared with the year-ago period. But seven years ago, in the September 2001 quarter, net profits of all listed firms fell by 22.03% from a year earlier. Incidentally, the rate of profit growth for the sample in the March 2001 quarter was -11.73%, in the June 2001 quarter 3.31%, and in the December 2001 quarter -9.91%. Even if we assume that the economy in 2008 is very different from the economy in 2001, the difference between growth in the last quarter and the contraction in the September 2001 quarter is too large. What that means is that downward earnings revisions still have a long way to go.
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Broking firm Motilal Oswal recently revised its earnings estimates downwards with the Sensex companies now estimated to grow earnings per share (EPS) by 8.6% in FY09 and 16.9% in FY10. If the contribution from Reliance Industries Ltd’ new businesses is left out, EPS growth for FY10 is estimated at just 6%. The brokerage expects the Sensex companies to post EPS growth rate of a mere 3.4%, compared with 16.9% in the first half. That fits in with the sudden and sharp deterioration of the economic climate since September.
But earnings revisions are a moving target. For instance, Motilal Oswal’s target for the total EPS of the Sensex companies for FY10 fell from Rs1,309 in June to Rs1,259 in September and now to Rs1,061.
Similarly, profit growth estimates for the Sensex companies for FY10 at Citigroup Inc. have been revised downwards from 17.09% in September to 11.8% currently. With FY09 Sensex EPS growth estimated at 12.9%, Citigroup expects next year to be worse than the current one. That fits in with macro estimates, the latest one being Goldman Sachs Group Inc.’s projection that gross domestic product (GDP) growth would slow from 6.7% in FY09 to 5.8% in FY10. Incidentally, 5.8% was also the GDP growth rate in FY02, which means the September 2001 quarter earnings contraction may not be far off the mark as a guide to current growth.
Nandan Chakraborty, head of research at Enam Securities, expects earnings to bottom out by the middle of next year.
The Mint analysis also throws up other interesting comparisons. Sales growth, for instance, at 27.54% for all firms (ex-oil) in the September 2008 quarter was much higher than in the September 2001 quarter, when sales contracted by 0.37% year-on-year. Since last quarter’s sales growth is largely the result of very high inflation, that should come down dramatically in the next few months.
Growth in “other income” is much lower now than in 2001, perhaps reflecting the impact the current downturn has had on the financial sector.
Growth in interest charges (67.7%) in the September 2008 quarter has also been much higher than the 2% growth recorded in the September 2001 quarter. The growth in depreciation, too, has been much more currently than in 2001, perhaps the result of a lot of capital expenditure by firms.
Indeed, the growth in depreciation charges is more or less the same as in the September 1998 quarter, which seems to indicate that industry will soon face the same excess capacity situation that existed after the capex boom of the late 1990s. Net profits for all listed firms (ex-oil) contracted by 17.1% in the September 1998 quarter.
To cut a long story short, the message from comparing the September quarter numbers with those of previous downturns is that the worst is yet to come.
Graphics by Paras Jain / Mint