FE Editorial : Another dull season

Written by The Financial Express | Updated: Jan 11 2013, 07:03am hrs
Going by the numbers, you wouldnt think there was any reason at all for the Indian market to have rallied the way it did last yearposting dollar gains of 24% to trump all emerging markets (EM). Growth was weaker than expected (GDP for the six months to September was 5.4%), consumer inflation stayed close to 10% levels and the rupee gave up a fifth of its value between April 2011 and December 2012. That volumes for manufacturers of commercial vehicles came off in the three months to December 2012, driven down by lower demand for freight, is an indication of how sluggish the economy is. As is the fact that project starts, as monitored by CMIE, were worse in Q3FY12 on an already weak Q2FY13. Its no surprise then that corporate earnings have been anaemic for some time nownet profits for the Sensex (ex-oil) have risen more than a 10% only in two of the seven quarters to September 2012. One would have imagined though that after such an uninspiring performance, it was time for an uptick.

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.