Slow growth, yes, but slowdown?

Slow growth, yes, but slowdown?

Mumbai: With June quarter earnings announcements kicking off on Friday, the performance of companies in the three-month period will be closely examined to see how they are coping with macroeconomic challenges and for evidence of a slowdown. Profits at listed Indian companies are expected to decelerate with high interest rates, rising input costs and commodity prices eating into profitability.

Housing Development Finance Corp. Ltd will be the first major firm to announce quarterly results on Friday.

Credit rating and research firm Crisil Ltd expects earnings would have remained under pressure in April-June due to costlier inputs, moderation in volume growth and increased competition.

“On a broad basis, we expect earnings growth to be lower than market consensus," said Sivasubramanian K.N., chief investment officer, Franklin Equity-India, Franklin Templeton Investments. “We expect the upcoming earnings season to provide an insight into how corporate India has coped with a difficult macro-environment of high inflation and rising rates."

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Inflation, tight monetary policy and input costs will combine to put a dent in India’s growth trajectory, according to various projection revisions, including those by the World Bank and the Asian Development Bank, after having expanded at 8.5% in the last fiscal.

The trend was similar for National Stock Exchange’s (NSE) Nifty companies. The aggregate profit of 44 of 50 Nifty companies grew 2% even as sales grew by 20%. All the Sensex firms are part of the Nifty.

Though inflationary concerns seem to be easing, the numbers continue to cause concern. Average inflation for the April-May period eased to 8.86% from 9.34% in the January-March quarter.

Below-expectation March quarter earnings, a lowering of the monsoon forecast and macroeconomic challenges continue to spook the markets. And, in the absence of any reforms, markets are banking on quarterly earnings to give them direction.

After weeks of lacklustre trading, Indian markets have shown some signs of recovery, but the Sensex still continues to trade 6.98% down from January levels, while the broader market index of NSE is trading 6.61% below its year-opening mark.

For the 30 Sensex stocks, Kotak Institutional Equities forecasts year-on-year earnings growth of 9.5%, but a decline of 2.2% on a quarter-on-quarter basis.

Crisil also expects sales to have risen and margins to have shrunk.

“Based on an analysis of the aggregate financial performance of select companies (excluding oil refining and marketing companies) across 23 industries, we expect revenues to grow by a robust 23%, but Ebitda (earnings before interest, tax, depreciation and amortization) margins are forecast to decline," Crisil said.

“Companies are being forced to partly absorb the rising costs, as slower volume growth and intense competition are restricting their pricing flexibility," said Prasad Koparkar, head (industry and customized research) at Crisil Research. “Further, with an increase in interest rates, we expect net margins to fall even more sharply."

The Sensex is currently trading at 17.29 times the earnings multiple and has a forward price-earnings multiple of 15.48. Its current earnings per share for the full year at 1,103.24 is below an expectation of 1,232.37, according to Bloomberg data.

In the quarter ended June, the index fell 3.08%, while the MSCI Emerging Markets Index lost 2.11%.

Revenue growth in the quarter is likely to be largely driven by higher price realizations. However, the price increases will not be enough to compensate for rising cost pressures, analysts said.

“Like the past quarters, revenue growth remains strong," said ICICI Securities Ltd in its earnings preview report. “However, strong revenue profile will get dislocated with declining operating margins (rising input and manpower costs) as we expect the Ebitda of our coverage universe (excluding oil and gas) to grow 11.1%."

Aggregate profit after tax growth for the first quarter is expected to be less than 8% from the year-ago period, a research report by Motilal Oswal Securities Ltd said. It is of the view that the banking sector will report a decline in earnings, while telecom and real estate companies will continue to see profit growth slowing.

With lending rates going up, there aren’t too many seekers of credit and banks are feeling the pressure.

“There are broader signs of a slowdown in credit offtake, while deposit mobilization has picked up significantly, only to be largely deployed at a negative spread into government bonds," Angel Broking Ltd said in its earnings preview.

India’s banking regulator, the Reserve Bank of India, has raised interest rates 10 times in the last 15 months and banks are not the only ones to feel the pinch of the higher cost of funds. Companies have had to spend more on servicing loans.

A Mint analysis of BSE-500 companies with sales above 1,000 crore shows that their interest coverage ratio has dropped from 10.74 in March 2010 to 9.4 for the quarter ended March 2011. The ratio is an indicator of how easily a company can repay its debt. A lower ratio means that the company is highly leveraged.

However, there are sectors that may report good numbers, brokerages said.

“Besides oil and gas, the other sectors to report strong growth are FMCG (fast-moving consumer goods), utilities, metals and media," the Motilal Oswal report said.

On a sectoral basis, information technology, automobiles, capital goods and pharma companies are expected to have done well in the quarter, according to ICICI Securities.

The brokerage sees cement and telecom firms as laggards because higher input costs hurt the former, while lower average revenue per user continues to affect the latter.