Results in an uncertain season

Results in an uncertain season

It’s corporate earnings season once again. Within a few days, the financial results for the first quarter of 2011-12 will start pouring in. The macroeconomic news has mostly been dismal, with reports of a slowdown dominating the press. Nor are these reports confined to India or the region. New uncertainties have raised their heads in the global markets, with the recovery in the advanced economies running out of steam and renewed concerns about sovereign debt in the euro zone.

What is worse is that this time the appetite for both fiscal and monetary stimulation is much lower than what it was immediately after the financial crisis. In India, growth is slowing, mainly because of the tightening by the Reserve Bank of India, while there are some tentative signs that high inflation is tending to crimp consumption. The markets have bounced back as the worries over Greece have receded, but these uncertainties are holding them back. It is against this sombre background that we await the corporate results for the first quarter of 2011-12.

First and foremost, the results will tell us whether sales growth, which has so far remained robust, has started to slow. One of the reasons RBI has said that the slowdown is not broad-based is because sales growth for firms has continued to be strong. The June quarter results will tell us whether inflation is at last making a dent in consumption and will perhaps also influence RBI’s decision on interest rates. The results will also show how badly investment demand is being hurt by the high rates and to what extent order inflows for capital goods companies have been affected. Commodity prices softened during the quarter, so it needs to be seen whether the pressure on margins is easing a bit. Earnings estimates for the Sensex remain elevated at 18-22% for FY12 and it’s not going to be easy to meet those elevated expectations.

That said, the saving grace is that much of the bad news is already baked into market prices. Indeed, the markets are hoping that we are nearing the end of the interest rate cycle and we have seen a resumption of net inflows from foreign institutional investors. But for the cycle to turn and the markets to move higher, we’ll need to see inflation coming under control.

Inflation or rising rates: which is the bigger danger? Tell us at