Mumbai: Profit growth at companies that constitute India’s two benchmark indices, the Sensex and Nifty, has been the worst in 10 quarters as the global economic slowdown, credit crunch and rising input costs wiped away revenue gains.

A Mint analysis shows that firms listed on the Bombay Stock Exchange’s 30-stock Sensex collectively posted a 10.76% year-on-year increase in net profits for the quarter ended 30 September. That’s their worst performance since the March 2006 quarter, when earnings had fallen by 0.67%.

Profit at firms in the broader 50-stock Nifty on the National Stock Exchange (NSE) fell by 0.46% in the three months ended September. All Sensex firms are also part of Nifty.

After the Reserve Bank of India (RBI) announced a series of measures to counter the liquidity crisis, experts are divided over how these companies will fare for the rest of the financial year.

Also See Net Effect (PDF)

“Worse quarters may be ahead because of the world economic slowdown and its effect on India," said Vinod Kumar Sharma, head of research at local brokerage Anagram Securities Ltd. “No company will escape."

Nitin Khandkar, vice-president (research) at Keynote Capitals Ltd, is not as sceptical and expects the rout to end in a quarter or two. “Profits have also been impacted by high interest costs for companies. Although we have seen some easing on interest rates, it might take a quarter or two" before companies benefit, he said.

Even in the September quarter, combined net revenue for the Sensex companies grew by 26.67% year-on-year, helped by higher prices. In the previous September quarter, sales growth was 14.38%.

Net profit growth for the Sensex and Nifty companies would have been better if oil firms were excluded. Oil companies depend on the volatile international crude prices and the subsidy sharing mechanism determined by the Union government, which skews their earnings lower.

If the two oil companies in the Sensex—Reliance Industries Ltd (RIL) and Oil and Natural Gas Corp. Ltd (ONGC)—are excluded, earnings growth for companies in the index would be 16.34%, up from the 11.45% rise in the June quarter.

Dark days: The Bombay Stock Exchange. Some experts say now is a good time to buy such stocks, but investors may not be convinced unless profit growth momentum is back on track. Abhijit Bhatlekar / Mint

For the purpose of this analysis, earnings of 28 Sensex firms and 45 Nifty companies available for the past 10 quarters were looked at. Real estate company DLF Ltd and the Anil Dhirubhai Ambani Group’s (Adag) Reliance Communications Ltd have been excluded because they were listed only recently.

Of the 28 Sensex companies, only seven reported losses for the September quarter, including ONGC, Maruti Suzuki India Ltd, Mahindra and Mahindra Ltd and Bharat Heavy Electricals Ltd.

Economy drag

Many analysts and fund managers are cautious about corporate performances over the next few quarters as a potential global economic slowdown starts to make its impact on India. Economists have already pared their economic growth estimates for India.

“Intensifying financial stress and global recessionary conditions prompted us to lower our FY09 GDP (gross domestic product) estimate to 7.2% from 7.5%," Citigroup Inc. said in a recent report.

“While consumption is expected to hold up given the fiscal stimulus, the intensification of financial stress has raised the borrowing costs for emerging economies, which in turn will impact investment."

RBI, in its latest macroeconomic review on 24 October, lowered its economic growth forecast to 7.5% from 8% for fiscal 2009.

India’s trade deficit is at $64 billion (about Rs3.16 trillion), and the Index of Industrial Production (IIP) has slumped to one of its lowest levels in recent times with growth at 4.9%.

The financial sector collapse in the US has led to a liquidity crunch worldwide and resulted in banks tightening their lending to each other and to companies.

The government and RBI have moved to ease money flow by cutting key interest rates and opening liquidity windows for mutual funds and non-banking finance companies, but analysts said the benefits would take a while to percolate.

Sectoral impact

Amid all the negative economic indicators, India’s inflation dropped to 10.68% in the week to 18 October because of the fall in global commodity prices. The softening of domestic commodity prices was also because of the volatility in the market and the depreciating rupee.

“Whenever there is high volatility, some companies get caught on the wrong foot," said Deepak Jasani, head of retail research at HDFC Securities Ltd.

Sharp increases in prices of key raw material such as steel earlier this year had seriously crimped profit growth for the Sensex and Nifty companies. Operating profit growth of the Sensex companies was 12.55%, slower than the 20.04% in the September 2007 quarter and the 28.46% rise in the same period the previous year.

Analysts interviewed by Mint were particularly worried about the banking, automobile, real estate, construction and engineering sectors.

“There is a slowdown in execution of projects in sectors such as construction and of new projects has slowed," said the head of research at a foreign institutional investor who didn’t wish to be identified.

“Banks’ deposits are mounting and they are not lending fearing bad debts," said Sharma of Anagram. “Banks will not know what hit them."

Value picks

Still, the performance of these Sensex companies and the grim scenario ahead is unlikely to lead to analysts downgrading the stocks.

“The markets have probably priced in such bad results," said Nilesh Shah, deputy managing director of ICICI Prudential Asset Management Co., which manages Rs49,772 crore worth of assets. “We expect bottoms around current levels if other things such as global financial flows and sentiment improve."

The Sensex is now trading at 11.89 times its estimated earnings for fiscal 2009, after some 51.75% value erosion this year. Four Sensex companies—Hindalco Industries Ltd, ICICI Bank Ltd, Tata Steel Ltd and Tata Motors Ltd—are trading below their book value. Price to book value, or P/BV, is the ratio of a firm’s market value to its book value, which is the net worth or the sum of equity and free reserves of a company. A less than 1 P/BV indicates that the stock may be a value pick.

Some say now is a good time to buy such stocks, but investors may not be convinced unless profit growth momentum is back on track.

Foreign institutional investors, or FIIs, the largest group of investors in the domestic markets, have withdrawn $12.78 billion from Indian equities so far this year. FIIs had invested $17.36 billion in 2007 in Indian stocks.