Editorial: Subdued earnings

Apr 07 2014, 03:35 IST
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SummarySensex trading at close to historic multiples

Even though earnings expectations for Q4FY13 are fairly tempered, it’s disconcerting to hear that Larsen & Toubro (L&T) may need to classify some R15,000 crore of orders as slow-moving. In a similar move a year ago, L&T had set aside some R17,000 crore of orders which it believed would not be executed in the near term. The Street would not, however, have expected a repeat, especially since the recent pick-up in orders of BHEL suggested demand might be returning to the capital goods space. But companies aren’t rushing to add capacity just yet, and the slow pace of execution of the orders that engineering firms have in hand will reflect not only in their March quarter results but also in the books of cement and steel companies. Indeed, the capex cycle may be some time away from turning because while it’s not clear how sanctions of loans grew in the March 2014 quarter, for the nine months to December they were virtually flat and increased just 2% yoy. Moreover, at R1.4 lakh crore, they were down a steep 60% over FY10 levels. That suggests banks aren’t going to be reporting any meaningful increase in disbursements for several months, a factor that will weigh on their top lines; borrowers shopping around for better rates will pressure margins. The performance of public sector banks in the March quarter isn’t expected to be particularly striking either since loan growth has been subdued at roughly 14% while competition would have hurt loan yields and a rise in toxic assets would call for more provisioning.

Taken together with the anticipated sharp drop in the profits of oil marketing companies of more than 40% yoy and subdued volumes reported by auto firms—whether for cars or commercial vehicles—this isn’t going to be a quarter to write home about. Kotak Institutional Equities estimates earnings for the Sensex set of firms will grow at a reasonable 7.4% yoy but the brokerage is forecasting a fall in profits of 5.6% yoy for the broader universe of companies that it tracks; even net of oil companies, the growth is estimated at a very subdued 6.1%. Once again, the best performers will be the IT and pharmaceutical sectors that stand to gain enormously from the 12% yoy depreciation of the rupee; the core sectors of the economy, it appears, will struggle for some more time. The Sensex seems to be running ahead of

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