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 at low base, metal prices have come down, banks have high provisioning and statistically it will not go up and on top of it a rate cut will help the companies significantly." Crisil research too is of the view that the downward trend in gross earnings Ebitda is bottoming out. "Ebitda has bottomed out and is primarily driven by softening of commodity prices and weak rupee continuing to support the export oriented sectors," said Mukesh Agarwal, president, Crisil Research.
Earning upgrade still some time away
Most experts are of the view that over the last 18 months, analysts have downgraded earnings quarter after quarter. While much of it has been a fall out of the slowdown in the economy, all negativities have been factored in the net profit estimate right now. So any positive surprise on the earnings front will have an impact on the markets expectations and in its forecast for future. But even though the declining trend in profit growth may be nearing its bottom, experts feel that the time when earnings will surprise the analysts and which will trigger the earnings upgrade is still sometime away. "It will depend on interest rate cycle, government policy and investment cycle," said Dua.
In a recent report Kotak Securities also kept to the view that there are no signs of upgrade right now. The Kotak report slashed the earnings forecast for 2012-13 from 7.5 per cent at the start of Q2 FY'13 to 5.8 per cent now. "2Q FY'13 results provided no evidence of earnings upgrade. Net profits beat our estimates but largely due to higher other income in few cases and a large one off item in case of NTPC," said a report by Sanjeev Prasad of Kotak Securities.
The weakness in the corporate performance is also reflected in the revenue and profit expansion of the BSE 100 companies (excluding IOCL, BPCL and HPCL) over the last seven quarters. In the 21 month period, the net sales of these companies have grown by 33 per cent from Rs 4,03,006 crore in the quarter ended December 2010 to Rs 5,35,728 crore in September 2012. On the other hand, the net profit for these firms have expanded by only 17.5 per cent in this period from Rs 59,928 crore in Dec 2010 to Rs 70,454 crore in September 2012.
The way ahead
In the four month period between June and September 2012, the Sensex rose by almost 18 per cent and even crossed 19,000 on October 4, 2012 on the back of improved global environment, the quantitative easing (QE 3) announcement by the Federal Reserve and reform initiatives taken by the government on raising the diesel prices, its decision to allow FDI in multi brand retail, cabinet clearance of FDI in pension sector and hike in FDI limit in insurance and aviation sector. If all these provided the sentiment boost for the markets, the second quarter earnings failed to excite the bourses and over the last six weeks, the market has been rangebound and has simply not been able to break-out. Certain brokerage houses project that it will cross 20,000 by the calendar year-end.
So for the optimists, the fact that the declining growth trend of corporate profits is close to bottoming out, a rate cut is possibly round the corner and global liquidity is on a rise. Combined with this is the step-up in the government's reform agenda and expectations of continued positive measures on the fiscal, governance and investment fronts. All these augur well in terms of positive cues for the markets going forward, even though stock picks need to be made keeping in mind the current valuations, as many companies are trading at a significant premium. "We expect markets to remain volatile considering the global uncertainty and slowdown in the Indian economy. Retail investors should keep investing regularly rather than trying to time the market and should stick to leaders in each sector," said Agarwal. Those already invested might be better off by holding on to their shares for the uptick in the coming quarters.