FE Editorial : Heady and steady
As one brokerage put it, the markets are heady but earnings, at best, will be steady. Indeed, the September earnings season has got off to a bit of a mixed start with Infosys missing estimates once again and Reliance Industries making up for it, posting profits in line with the Street's expectations. Earnings for the Sensex set of companies are expected to increase by 5% y-o-y, staying more or less on track with recent quarters, net of oil companies' numbers, though the number could look better. At an aggregate level, revenues are unlikely to grow by more than 15% y-o-y despite inflation remaining elevated because a slowing economy has pushed back demand. Prices of key inputs have eased somewhat—though it's possible that margins do not contract relative to the June quarter, they may still be lower than those in the September 2011 quarter; for a sample of 1,500 companies, the operating profit margin for the three months to June 2012 was 13.3%, leaving the operating profit flat y-o-y.
The unfortunate bit about India Inc's growth story over the past year or so has been the flat or falling order books of capital goods companies and their contracting margins, the consequence of high input costs, stagnant volumes and a lack of pricing power. That trend is unlikely to change soon even if many of the companies in this space are expected to deliver a top line growth of around 15% y-o-y. A hint of an uptick in demand, which could translate into bigger order books, would be encouraging. In the consumption space, while FMCG firms may have been able to push through volumes, passenger car and two-wheeler volumes have been weak and companies haven't displayed any pricing power. So, although prices of raw materials may have softened, margins could be under pressure. All in all, this will be a moderate quarter for corporate India, with probably few hints of an earnings uptrend even if the markets think otherwise. Depending on whether they're net importers or exporters—and to what extent they have hedged their exposures—the sudden appreciation of the rupee towards the end of September would benefit or hurt companies. Also, it's unlikely that balance sheets have become less leveraged compared with three months ago since no company has been able to raise equity. So, whether it's a Bharti, a GVK, a Punj Lloyd or a DLF, borrowings are unlikely to have come down significantly. Balance sheets of PSU banks are expected to stay stressed, with the quantum of restructured loans high while private sector banks will do reasonably well. Given the difficult economic environment, India Inc will probably muddle through for the rest of 2012-13 in the absence of a pick-up in capital expenditure and slowing consumption spends; a cut in interest rates, though, would ease the pressure on cash flows.
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