Hold on to equities, look for a rebound

Nov 19 2012, 09:37 IST
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SummaryThose already invested might be better off holding on to their shares.

The second quarter numbers of firms announced during the course of the current results season has largely proved to be a dampener.

Far from perking up sentiments prevailing in the markets, the year-on-year topline growth rates for Sensex firms continued to decline for the fourth straight quarter, even as operating profit and net profit figures continued downhill for the third straight quarter.

So even as there is little cheer for the markets, which closely follow the earnings growth, there is a glimmer of hope. Experts are of the view that corporate earnings may be close to bottoming out and a rebound in earnings growth is likely in a quarter or two, something that should get reflected in the stock market performances in the months to come.

Declining growth trend bottoming out

The growth in net sales for the 30 companies that form the benchmark Sensex clocked in at 24 per cent in the quarter ended September 30, 2011, with the growth rate coming down to 17.2 per cent in June 2012 and then further to 11.5 per cent in the September quarter this fiscal. For the Sensex companies, the net profit growth, which stood at 21.5 per cent in March 2012, came down to 11.2 per cent in June 2012 and down further at 8.7 per cent in the quarter ended September 2012.

"While there is still some time to go for earnings upgrade, slowdown in earnings growth is close to bottoming out," said Gaurav Dua, head of research at Sharekhan. "In Q1 and Q2 this year the revenue growth momentum has slowed down but the margin pressure is also easing." Companies have been working hard to bring down their expenditure in order to reduce the pressure on margins. For Sensex firms, year-on-year growth rate of total expenses has also come down from 30 per cent in September 2011 to 13.2 per cent in September 2012. While a softening of the commodity prices is helping their cause, firms have also brought down the growth rate in expenditure on salary and wages, as well as the pressure on account of interest expenditure.

There are others who agree with this view and say that earnings should witness a pick-up in a quarter or two. "I think the downtrend is bottoming out and in a quarter or two it should come up," said Pankaj Pandey, head of research at ICICIdirect. "Statistically, infrastructure companies are

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