Mumbai: Those looking to corporate fundamentals for some comfort from the mayhem in the markets will be disappointed with the June quarter results. ‘Headline’ numbers look impressive, with earnings of the 30 companies that constitute Bombay Stock Exchange’s (BSE) Sensex growing by 30.65% on a year-on-year basis last quarter. This is even higher than the growth of 28.63% in the March quarter.
But scratch beneath the surface, and it emerges that core operating earnings have grown at much lower rates. Growth for a large number of companies was helped by other income. This, in turn, was due to a one-off factor, the appreciation in the rupee. Companies that borrowed abroad ended up paying a lower interest in rupee terms. Operating profit growth for the Sensex companies, which excludes such income, was just 15.88%.
Worse still, the growth in net sales, at 15%, was the lowest in at least the last four quarters. Excluding financial companies and firms in the oil and gas sector, which somewhat distort the picture, operating profit growth of Sensex firms stood at 17.87% last quarter, down substantially from 33.42% in the March quarter, and about 50% in the preceding two quarters.
Is a slowdown looming? Most market analysts agree, but also point out that the drop in growth was expected. Anup Maheshwari, executive vice-president and head of equities and corporate strategy at DSP Merrill Lynch Mutual Fund says: “Given last year’s high base, earnings growth was expected to be lower than previous quarters. We were expecting earnings growth of 16-18% for large cap companies forming the BSE 100.”
But as Ajit Surana, managing director at Dimensional Securities says, “What’s surprising is that the markets kept rising despite the expected slowdown in earnings.” Even after Wednesday’s fall, the National Stock Exchange’s benchmark index of 50 companies, Nifty has risen by 14% since April. Surana adds that apart from ITC Ltd and State Bank of India (SBI), hardly any large-sized companies posted positive earnings surprises.
Maheshwari has a theory that explains this. “Against the disappointment in say Tata Motors’ results, one has a positive surprise from Maruti. And while ICICI Bank’s results were disappointing, SBI’s was fine,” he says. Thus, despite the seeming lack of positive earnings surprises last quarter, core earnings growth of Sensex companies has somehow veered to the 18% mark—in line with market expectations. A Mint analysis of 1,290 non-oil and non-finance companies also shows that operating profit grew 18.7%.
Some view this as a disappointment—with the results barely meeting already low expectations, there’s no case for an upgrade in aggregate earnings estimates, which the rising markets seem to have had assumed. Besides, the research head of a private sector mutual fund says that the quality of earnings has also declined. Banking sector heavyweights, ICICI Bank Ltd and SBI both reported an increase in net NPAs (non-performing assets, or bad loans), adjusted for which earnings would be dismal, he adds.
Analysts add that the low-key June quarter results may have just set the tone for the rest of the year. The research head of the private sector mutual fund says: “A slowdown in industry growth is always preceded by a slowdown in non-food credit growth, which has come down to 24%, Besides, the growth rate of most components in the IIP has decelerated. With the rupee appreciation also hitting export-oriented companies, the outlook for earnings growth looks bleak for the rest of the year.”