The big jump in India?s manufacturing PMI for December to 54.2 from just 51 in November was a nice surprise and in sync with the data coming out of the US. Even better was the near 7% year-on-year uptick in infrastructure for November, coming as it did on the back of an anaemic 0.3% year-on-year in October. But not all the data is encouraging, because the IIP for October came in at a negative 5% and in November factory output may not have grown more than 1%. As we head into earnings season, there?s a big blow that?s been dealt: CMIE tells us new project announcements in the three months to December 2011 fell to R1.88 lakh crore; that?s not just a sharp drop of 41% year-on-year and 17% sequentially, in absolute levels, the number is at its lowest levels since 2004-05. It?s little consolation that project announcements in the private sector were up a smart 54% sequentially, because that?s on a very small base. Also, the bigger issue, and something that?s really disconcerting, is that projects are getting held up for one reason or another. Stalled projects, as a proportion of projects being implemented, are at a historic high. The situation must be agonising for promoters whose interest meter is ticking.

Also, given that the amount involved is a huge R5.75 lakh crore and almost 100% bigger than it was last year, one can imagine what banks, who have loaned this money, must be going through.

What?s more, the bigger share of these stalled ventures belongs to the private sector. With new ventures not taking off and those that are stuck midway, it?s little wonder that banks are not able to lend enough; in the fortnight to December 16, 2011, banks together lent just 16.8% more than they did in the corresponding fortnight of 2010. While consumer spends appeared to be holding up, confidence is clearly waning as can be gauged from the fact that personal loans, which were growing at 18%-plus in April last year, are now growing at about 13%-plus.

Against this kind of a macro-economic backdrop, it?s not surprising that Bank of America Merrill Lynch expects, in what?s the weakest forecast in eight quarters, consolidated earnings for the Sensex set of companies to grow 9.2% year-on-year in the three months to December. The growth in operating profits, at 8.5% year-on-year, it believes, could be at its slowest in nine quarters with margins coming off by about 160 basis points year-on-year. Some of the weakness in the bottom line would, of course, result from a slowing top line momentum; net sales, this time around, are tipped to grow at 18% year-on-year, less impressive than the 20%-plus clocked in the three preceding quarters.

Although Sensex earnings in the June quarter had virtually wilted, growing at just 8% year-on-year, there was a slight rebound in the three months to September, when they grew just under 11% year-on-year. However, the December quarter could turn out to be a disappointing one, even if the AS-11 norms have been amended so that mark-to-market hits due to exchange differences on long-term foreign currency assets and liabilities can be amortised in the P&L over the life of the asset or liability. While a few of the larger companies are expected to do badly, like a Maruti, Reliance Communications and even Reliance Industries, it?s likely that a whole host of smaller companies will throw up very weak numbers. For the universe of companies that it tracks, Kotak Institutional Equities expects profits after tax to fall 8.4% year-on-year and the drop could be sharper as one adds to the list. Just for some perspective, net profits, for a sample of 2,437 companies (excluding banks, NBFCs and oil marketing companies) crashed by some 50% year-on-year in the three months to September 2011.

In fact, analysts are already pencilling in higher non-performing assets (NPAs) for banks predicated on pressures faced by mid-corporates and SMEs who get badly squeezed in a downturn; NPAs and restructured loans are now expected to double over 2011-13. Indeed, the deterioration in the asset quality may start showing up in the December quarter itself even if top lines grow. However, with top line growth at banks likely to be under pressure in a few months?loan growth could taper off to as low as 14%?the earnings outlook for 2012-13 will remain subdued unless there is a dramatic turnaround in the investment cycle. As of now, analysts are estimating 2011-12 Sensex earnings at around R1,130 and those for next year at close to R1,200 levels, but it?s quite possible these will need to be pruned. That means the market will turn more expensive; right now, at 16,150 levels, the Sensex trades at a one-year forward price-earnings multiple of 14 times, which, although lower than the historical multiple of 15 times, isn?t cheap, given that profits aren?t really keeping pace. But there?s hope in that the interest rate cycle has probably peaked and we could see the cost of money starting to go down in a couple of months. There?s also some wishful thinking that the government will get going. In the meantime, though, expectations are rooted firmly to the ground.

shobhana.subramanian@expressindia.com