Editorial: Still expensive

Aug 19 2013, 00:33 IST
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SummaryWith earnings downgrades likely, P-E ratios still high

That net profits for the ex-energy set of Sensex firms fell nearly 7% yoy while net profits rose just 1.4% yoy is evidence of how stressed India Inc is. Whether it is the shortage of key raw materials that keeps India Inc from operating at optimal levels or inflation-induced cut in consumer-spends, industry is struggling to make money. For a larger universe of 2,693 companies (excluding banks and financials) profits in Q1FY14 have come off by 9%. Among the bigger disappointments of Q1FY14 was that of engineering firm BHEL whose profits crashed nearly 50% yoy. The deceleration in volumes is more worrying. At Shree Cement, they fell 4% while at Ashok Leyland they were lower by 21% and at Hero Motocorp down by 4%. Subdued demand for cement across companies can only mean that construction activity is dull which is not good news; the sector generates employment and has a multiplier-effect on the economy since much of the construction is related to housing. This time around, the consumer staples space too has fared poorly-volumes at HUL were up just 4% while at Nestle they rose an estimated 3%, a sign of how households are cutting back on basic expenses. It's not surprising then that the top line for the same sample of 2,693 firms has grown just 2.3%, the slowest in two years.

Even more disheartening, order inflows at most capital goods companies remain small, a sign that the capex cycle is far from turning; at BHEL, order inflows were just Rs 1,500 crore, a drop of 76% yoy while at ABB, the fall was 15% yoy. Given how management commentary has been extremely cautious, the Sensex earnings forecast of R1,250 for FY14 is in danger of being revised downwards. In other words the market remains expensive as do most stocks and, therefore, companies looking to mop up equity from the market in a bid to de-leverage are unlikely to be able to do so. At a time when cash flows look like they're going to stay weak, the risk of defaults is rising.

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