Profit and loss account

Profit and loss account
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First Published: Mon, Apr 14 2008. 10 15 PM IST

Illustration: Jayachandran/ Mint
Illustration: Jayachandran/ Mint
Updated: Mon, Apr 14 2008. 10 15 PM IST
The new earnings season starts this week. After almost five years, corporate results have once again become critical for the stock market. In the boom years of 2003-07, the flood of liquidity ensured that stocks went up even if companies missed their earnings estimates. Why else should the market have peaked as late as January, in spite of the fact that earnings growth had been decelerating for several quarters? During the bull run, what was lost in earnings momentum could easily have been made up by higher valuations, attributed to “embedded value”, or to “unlocking value” or, when all other subterfuge failed, to the “India growth story”. With the bursting of the bubble, companies have no other option but to rely on earnings growth to improve their performance in the market. That is why the fourth quarter earnings are so important.
Illustration: Jayachandran/ Mint
The macro picture is clear. The economy is slowing, thanks to recessionary conditions in the US as well as monetary tightening by the Reserve Bank of India. But there are many gaps in that picture, which the corporate results could help to fill. For instance, the guidance given by the technology majors is keenly awaited to preserve the slender hope that outsourcing may not be affected despite the dire straits that Western banks are in. Or, while consumption demand has been squeezed by high interest rates for several quarters, is investment demand also being hit? That will be clear from the additions to the order books of engineering firms. And while it’s obvious that inflation will eat into profit margins, has it also started affecting consumer demand? Will companies be able to make up in volumes what they lose out in margins? How bad is the outlook for real estate?
Apart from these broad themes, there are also a host of more specific questions. Bank and corporate earnings for the fourth quarter are expected to indicate just how much of an exposure they have to credit and foreign exchange bets that went disastrously wrong. The “other income” component of their revenues will be scrutinized to gauge the role treasury profits had played in boosting earnings in earlier quarters —with the market crash, these profits will no longer act as a cushion.
The Indian market trades at a premium to its peers, though valuations have come down substantially. The new corporate results will decide if that premium is justified.
Will earnings disappoint? Write to us at views@livemint.com
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First Published: Mon, Apr 14 2008. 10 15 PM IST
More Topics: Ourviews | Profit | Loss | Corporate Results | Growth |