India Inc: all may not be well, but growth story is still intact

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: Every intermittent correction in the markets sees the sanguine market participant take refuge in the 'earnings growth’ story. They point out towards the robust earnings posted by the Indian corporates.

However, the meltdown in the markets since the beginning of the calendar year (CY) 2008 and a series of local and global developments unfolding since then, has left these optimists with very little to point towards. The sustainability of India's earnings growth is under doubt and so is the direction of the market.

The Q4 results, which came at the backdrop of the ever-looming sub prime and subsequent credit crisis in the US and the ever-spiking inflation on our local shores, were expected to be on the receiving end by the experts.

However, the not-so-impressive returns, posted by Indian companies, have now got the optimists to look at the overall Indian economy growth story. And clearly this is not a time to celebrate, especially, when a careful analysis of the numbers posted by India Inc, for the last quarter, is done. On a Y-o-Y basis, companies that have disclosed their performance till date have shown a rise in both their revenues and earnings. However, comparing these numbers on a sequential quarter on quarter (q-o-q) basis, the revenues have grown, but the earnings growth has witnessed severe pressure.

While revenues on a q-o-q basis have increased by more than 11%, the operating margin has faced a severe pressure, decreasing by around 1.2% in December quarter compared to the March quarter.

Ajay Parmar, Head of Research, Emkay Shares reckons, "The Q4 results were not all that dismal as anticipated, in fact few of the industry such as telecom and IT came out with better than expected results. Irrespective of negative news surrounding the corporate since the beginning of the year they have managed to give some positive surprises".

The fall in the operating profit on sequential quarter basis of the companies can be attributed to inflation. Key input costs like raw material prices, especially fuel and power costs have been rising through the roof. "Though the issue of rising interest rate and input cost for the corporate still prevails, due to rise in raw material cost and hike in the interest rates, we may see a subdued performance for the next few quarters,” says Parmar.

However Parmar was quick to add, "Going forward as the measure taken by the RBI fructifies to tame inflation and if the crop procurement remains high post the monsoons (as expected), we might see some lenient measures by the apex bank lending a helping a hand to the industry”.

Stock markets, which works on presumption that it will reflect long-term fundamentals, were quick to respond to the earnings posted by the companies. On the industry specific level, interest rate sensitive sectors such as banking, auto, real estate have come under the scanner of the fund managers mainly on the back of fear of hike in the interest rates by the RBI and write offs by the banks due to over exposure to the forex derivatives products.

Amidst all the uncertainty in the local and global economy, the mandate passed to the companies by the Institute of chattered accountants of India (ICAI) to disclose losses due to derivatives exposure (foreign currency and commodities) from April 1, 2008 came as a surprise to the Indian corporate sector. Though some banks came out with write offs and provisioning to the derivatives exposure in the Q4 numbers markets didn't react to the news in a huge way and experts believe that the issue has already been factored.

Alpesh Shah, a chartered accountant with a leading firm said, “It’s too early to estimate the exact quantum of such losses for corporate India as some firms have taken the legal route. As the situation improves, the mark-to- market (MTM) losses may be trimmed down. However, we do not see this to be a widespread phenomenon that will impact across-the-board earnings.”

However experts believe that sectors like FMCG and telecom having a high dependence on local consumption and other sectors such as IT, pharmaceutical and capital goods would offer good returns in the medium to long term.

In the context of the stock markets, participation by the global players still remains a matter of concern but with improving conditions in the US and receding commodities prices, experts believe that India will still remain one of the fastest growing economies thus attracting foreign funds to the Indian markets.