There’s only about a week to go before the current financial results reporting season ends. About three-fourths of the companies that comprise the Nifty index have reported results for the June quarter, and the trends are far from encouraging.
In fact, there have been a number of downgrades in earnings estimates across sectors, indicating that the results have been disappointing. Results in some sectors such as pharmaceuticals and information technology (IT) were more or less in line with expectations, but even there earnings estimates were lowered because of different reasons. Results of some banks, capital goods and power utilities were considerably below expectations. Infrastructure and capital goods companies are showing sings of struggle on account of various factors such as high interest rates, low availability of coal and issues related to timely execution of projects. Profits of some metal companies were better than expected, but the recent correction in commodity prices will offset some of the exuberance on account of the results. Of course, there are some sectors which did well such as telecom and consumer staples.
But like in the March quarter, profit margins have been under pressure. Based on data complied by Mint, revenue growth continues to be above 20% for the Nifty companies that have announced results so far. But operating profit growth was much lower at around 10% thanks to a sharp increase in material costs. Growth rates in the March quarter were almost exactly the same. And the trend in the near future is expected to be the same. The Thomson Reuters/Jefferies CRB Index, which is a global commodities benchmark, has dropped about 12% from its highs in April, providing some relief on the materials cost front. But on a year-on-year basis, the index is still around 22% higher. In other words, margins would continue to be under pressure in the near term.
The only positive sign seems to be the fact that valuations of Indian stocks have come down considerably this year relative to other markets. But as far as the performance of Indian companies is concerned, there’s hardly anything to inspire investor confidence. The outlook isn’t very bright either what with high interest rates persisting. And industries such as IT and metals, which had been doing relatively better because of their strong linkages to the global economy, will get affected because of rising uncertainties in the US and the euro zone.
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