Mumbai: The performance of companies in the three months ended December will be better than that in the preceding quarter, analysts say, although they are refraining from calling it a turnaround.

That, they add, will happen after the elections.

Still, coming as it does on the back of what some of the analysts term the green shoots seen in the September quarter, this performance could indicate that the worst is behind these companies.

The December quarter is the third of the financial year for most Indian companies that follow a April-March accounting period.

The earnings season starts with software services company Infosys Ltd and new generation private bank IndusInd Bank Ltd, both of which will announce their results on Friday.

“Earnings should be marginally better than expectations," said Rakesh Rawal, chief executive officer of private wealth management at Anand Rathi Financial Services Ltd, ascribing the improvement to a good monsoon and an “improvement in the economic scenario". The result will be a gradual improvement because “the economy has still not recovered completely", he added.

The Indian economy expanded at an average rate in excess of 8% in the seven years to 2011-12, but slowed to a 5% growth rate in 2012-13. Analysts expect it grow at the same rate, or marginally slower, in the year that will end on 31 March.

Since it was re-elected to power in 2009, the United Progressive Alliance has been besieged by allegations of corruption in everything from the allocation of spectrum to the allotment of coal mines to the organization of the 2010 Commonwealth Games. The fiscal and current account deficits and inflation have soared, and interest rates continue to remain high. While most macroeconomic data has improved in recent months, it still hasn’t resulted in a turnaround, either in performance or sentiment.

That will happen only after the elections that will most likely take place in April and May, said Rawal. That’s when there will be more clarity (in policy), he added, and companies will be more willing to commit capital expenditure. “The revival of the capex cycle could be the big driver for growth after the elections."

The stock market could still re-rate the companies after the results, said Deven Choksey, managing director and chief executive officer of KR Choksey Shares and Securities Pvt. Ltd, but that will depend on the “commentary and outlook of companies". As for the earnings, they “may be better than that in the second quarter but are not going to be spectacularly different," he added.

In the September quarter, aggregate stand-alone (excluding the numbers of their subsidiaries) net profits of 30 Sensex companies rose 1.2% against a 3.58% drop in the June quarter. Similarly, their aggregate net sales in the September quarter rose 13.91% against a 2.15% rise in the June quarter.

If a turnaround isn’t imminent, it is because challenges remain, say analysts: inflation, low investment, a vulnerable local currency, and high interest rates.

“We do not expect a recovery any time soon because of structural imbalances such as high inflation and interest rates," said Dhananjay Sinha, head of research and strategist at Emkay Global Financial Services Pvt. Ltd.

“Government spending needs to take off for investment activity to improve. Earnings will recover once these adjustments take place."

According to a Bank of America Merrill Lynch report dated 7 January, international subsidiaries such as Jaguar Land Rover and Tata Steel Europe (for Tata Motors Ltd and Tata Steel Ltd respectively) will drive the growth of Sensex companies, which are expected to report a 21.9% increase in profits on a consolidated basis. On a standalone basis, the report forecast profit growth at a modest 12.9%.

“So is this a turn in earnings cycle? The signals are mixed," analysts Jyotivardhan Jaipuria and Anand Kumar write in the report.

According to the report, the aggregate sales of Sensex companies will grow 15.2% year-on-year, a six-quarter high. Aggregate operating profit margin or earnings before interest, taxes, depreciation, and amortization, expressed as a proportion of revenue, is expected to see a 135 basis point expansion on a year-on-year basis. A basis point is one-hundredth of a percentage point.

On the negative side, Jaipuria and Kumar write that there is a huge concentration of this profit growth with five of 30 Sensex companies accounting for around 69% of profit growth.

The rupee ended calendar year 2013 at 61.8 against the US dollar, appreciating 11.41% from its record low of 68.85 posted on 28 August, and that will likely have some impact on the numbers of companies, say analysts.

A 7 January Religare Capital Markets Ltd report said that the appreciation in the rupee in the third quarter from the record lows of August provided some respite, in terms of lower cost of imports, and that, as a result, the operating profit margins for Sensex companies other than oil refiners would expand by 104 basis points on a year-on-year basis.

India’s software services companies saw a blockbuster September quarter on account of more business as well as the benefits they derived from the rupee’s depreciation (most of their earnings is in dollars), but that is unlikely to be repeated in December, say analysts. The tapering off of budgets (most client companies follow a calendar year for accounting purposes as well), and the holiday season traditionally make the December quarter a weak one for information technology (IT) services firms.

“Constant-currency growth is likely to remain muted in December quarter due to seasonality," JPMorgan analysts Viju K. George and Amit Sharma wrote in a note on Indian IT services on 7 January.

“Furloughs in several verticals (primarily hi-tech, manufacturing and telecom), holidays and planned leaves generally cause meaningful revenue growth headwinds in the December quarter," they added.

JPMorgan expects large Indian IT companies to report 0.8-2.5% quarter-on-quarter constant-currency revenue growth for the quarter. It says that the depreciation of the US dollar versus all major currencies during the quarter would likely add another 0.7-1.2% points to reported US dollar growth.

The other sectors present a mixed bag.

According to a Bloomberg News report on Tuesday, Tata Steel and Steel Authority of India Ltd (SAIL), the nation’s biggest steel producers, are set to report their smallest profit margins in more than a decade as demand for the alloy increases at the slowest pace since the global recession.

The operating profit margin at Tata Steel’s Indian unit will be 30.1% in the year ending 31 March, while SAIL’s will be 11.1%, according to estimates compiled by Bloomberg. Those numbers are likely to be reflected in the third quarter results of the two companies.

Among automotive companies, Tata Motors is likely to steal the show, led by a strong performance from Jaguar Land Rover. Angel Broking expects the auto companies it covers to post strong earnings growth of 40.7% year-on-year, despite the decline in volumes, largely because of Tata Motors’ robust growth.

If the company was to be excluded, the growth in revenue would be almost flat, and earnings would increase by a modest 9.4% year-on-year.

For capital goods companies, margin pressure and high interest costs will remain a drag on profitability. Angel Broking expects the capital goods companies it covers to report a steep net profit fall of 23.9% year-on-year largely because of competition, project delays, and high interest costs.

Earnings of cement companies are likely to be hurt by lower realizations, according to most brokerages.

State-owned banks will continue their lacklustre performance and there is unlikely to be any significant improvement in terms of the bad loans on their books. According to Bank of America Merrill Lynch, the earnings of state-owned banks may decline by around 5% to 25% on a year-on-year basis due to lower margins, higher wage and credit costs and a mark to market hit on their bond holdings.

Still, the one constant message is simply that only a full-fledged economic recovery will see a revival of corporate fortunes.

Krishna Merchant contributed to this story.

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