The earnings season starts off this week. This time, the purchasing managers’ indices are showing a moderation in growth. But the slight slowdown is in month-on-month seasonally adjusted growth, so it may not show up in the September quarter corporate results, in which growth is, for most companies, measured on a year on year (y-o-y) basis. Indeed, in the year-ago period, profits after tax of the Sensex companies were negative. The favourable base effect will therefore persist in the forthcoming results.

Nevertheless, we should look out for signs and portents of an imminent moderation in growth. Companies’ guidance for the rest of the year will be crucial. Order flows for capital goods companies need to be scrutinized for any signs of a pick-up in capital expenditure—there have been murmurs of late about capex growth not being all it’s cracked up to be.

Consumption demand is expected to pick up when income from this year’s bumper harvest is in the hands of the farmer and inflation comes down, and that will happen only later this year. So the first quarter’s consumption trends should continue, although it will be interesting to see the impact inflation is having on demand and on margins. Bank non-performing assets and restructured loans will also provide clues whether growth is moderating.

It makes little sense to talk of the earnings of the Sensex companies, given their wide diversity. For example, Motilal Oswal Financial Services Ltd estimates profits after tax of the Sensex companies to increase by 25% y-o-y. But the brokerage points out that Tata Motors Ltd and Tata Steel Ltd are a huge “swing factor" and excluding these two companies, Sensex PAT growth would be 10%. The turnaround at Jaguar Land Rover, Corus and Novelis Inc. will have a massive effect on the performance of Tata Motors, Tata Steel and Hindalco Industries Ltd respectively, an impact illustrated by Citigroup Inc.’s estimate that Tata Motors’ profit after tax will increase by 3,087% y-o-y in the September quarter.

An earlier report by Citigroup had underlined the issue dramatically. It said that while PAT growth for the Sensex companies (after taking out the oil companies that have volatile earnings which depend on government oil pricing and subsidy policies) was 34% y-o-y in the June quarter.

Graphic: Naveen Kumar Saini/Mint

The purchasing managers’ surveys show higher input prices, but a moderation in output price inflation. That should impact margins. But much depends on the industry you’re looking at—while higher metal prices will help commodity producers, they will hurt end-user industries.

Continued food price inflation will hurt consumer staples companies. The chart shows how the sectors have fared in the last three months and, since markets are forward-looking, they provide clues about the relative performance of the sectors in the second quarter.

India enjoys a substantial premium to other emerging markets and it’s important for Q2 earnings to meet estimates to keep that premium intact. As a report by Macquarie Research underlines, “In the past two months, post the disappointing Q1 results season, there have been more EPS (earnings per share) downgrades than upgrades. Although the revisions balance has improved marginally from August to September, it is currently in a neutral to negative zone and the Q2 results will set the tone for the direction of revisions."

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