The advance taxes paid by Indian companies for the fourth quarter are a timely reminder that earnings growth continues to be robust.
Reliance Industries, State Bank of India, Mahindra and Mahindra, Larsen and Toubro, Indian Hotels, ICICI Bank, HDFC Bank and Ambuja Cements have all paid much higher advance tax for the fourth quarter of fiscal 2008, compared with the year-ago period. In several cases, tax paid is double over the same quarter last year, indicating strong earnings growth. Also, the companies that are paying higher advance taxes are to be found across the board, in industries from banking to capital goods to cement. The question is: How do we reconcile the growth in advance taxes paid with the recent indications of a slowdown in the economy, especially in industrial output?
Despite the optimism injected by the advance tax payments, the combination of lower macro numbers and a decelerating trend in corporate earnings growth over the last few quarters is hard to ignore. In fact, the fourth quarter numbers may not be the best guide to the future and the worst is yet to come.
(Illustration by: Malay Karmakar / Mint)
With Europe and Japan being hit by appreciating currencies, with crude oil priced at more than $100 a barrel and with the spike in commodity prices, a slowdown in earnings growth may be unavoidable.
The era of ultra-cheap finance is over and that could affect the expansion plans of some companies. If risk aversion continues, as it shows every sign of doing, external financing as well as funding through the equity markets will become much more expensive. That, in turn, will have implications for the order flows to capital goods companies. Consumption demand has been slowing for months and it remains to be seen if the government’s recent attempt to lower interest rates by diktat is able to reverse that trend. The latest auctions of plots in Mumbai’s Bandra-Kurla Complex show that cracks are developing in the country’s real estate markets. Factor in concerns about the extent of the hit that companies and banks may have to take on their exposure to credit and currency derivatives and it’s easy to understand why analysts are revising their earnings estimates for fiscal 2009 downward.
In short, there may be some pleasant surprises in earnings for the fourth quarter, but they are unlikely to signal a reversal in trend.
How do strong advance tax payments fit into the larger picture of an economic slowdown? Write to us at email@example.com