However, that may be some time awayCitigroup says the Sensex ex-oil set of companies is poised to report only a 7.5% rise in net profits in the three months to December 2012, with sales reporting a single-digit increase and operating margins continuing to be under pressure. That, again, is not totally unexpected. Factory output may have jumped 8.2% y-o-y in October, driven by festive demand, but is expected to contract by about 1% for November while the infrastructure sector grew at just 1.8% y-o-y in November compared with 6.5% y-o-y in October.
The bottom line is that demand remains weak: car sales this year, for instance, are tipped to grow at near zero levels, the slowest in nine years. That means the aggregate earnings picture isnt going to be a pretty one; helped by a base effect, the top line is estimated to grow by about 9-10%, hurting operating margins and leaving net profit growth muted at 7-8%. Once again, though, the most closely-watched number will be the size of the order books at capital goods firms; Bhel, whose profits fell 10% y-o-y in the September 2012 quarter, saw a smaller order book at the end of September than in June, while ABB saw orders plunge 33% y-o-y. So far, theres been little evidence to suggest any revival in capex but much that tells of delays in execution, which means it could be a double whammy for capital goods firms. Moreover, analysts would also take note of the strength of corporate balance sheets. Although the equity markets have rallied, a whole host of companies remain highly leveraged and, as a recent study by Barclays pointed out, 40 of the top 100 borrowers in India had high leverage ratios with operating free-cash flows barely enough to take care of their maintenance capex. Not yet time, one would think, for a meaningful earnings upgrade.