Early earnings numbers cause for cautious cheer

Apr 21 2014, 00:40 IST
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The bad news is that the capex cycle is far from turning The bad news is that the capex cycle is far from turning
SummaryBut BHEL’s results show the capex cycle is far from turning

Well begun, they say, is half done. But that doesn’t always hold true for earnings seasons, which often get off to a great start but end in a whimper. This time around, too, the first lot of March quarter numbers looks robust mainly because the sample is heavily skewed in favour of IT companies that have gained from a weaker rupee.

The bad news is that the capex cycle is far from turning. Bharat Heavy Electricals’ provisional results showed the engineering firm’s order book, at the end of March 2014, remained stagnant at R1 lakh crore, although inflows picked up somewhat in Q4FY14. Indeed, the capital goods segment — within the IIP — contracted for the third consecutive month to a minus 17.4% in February, taking the fall in FY14 so far to 2.6%. This means other capital goods firms are likely to fare poorly too.

In fact, going by the factory output data, industry is yet to come out of the slump; industrial production contracted 1.9% year-on-year in February after having risen 0.8% in January. Manufacturing in particular contracted 3.7% in February, reflecting poor demand both at home and abroad.

Management commentary so far has been mixed. N Chandrasekaran, MD & CEO, Tata Consultancy Services, was confident his company would do better in FY15 given the trends in discretionary spends and the firm’s strong deal pipeline. TCS’ Q4 numbers were a tad soft with growth coming in from volumes rather than pricing and margins slipping sequentially over Q3FY14.

While Infosys surprised with dollar revenue guidance of between 7-9% for FY15, president BG Srinivas sounded rather cautious about the demand environment.

Srinivas said that while there were signs of recovery in the US and Europe was stable, there was no extraordinary growth.

For a sample of 29 companies, including banks, net profits in the three months to March are up 27% year-on-year. What has helped is that Reliance Industries’ profits haven’t fallen this time, they rose 0.8% year-on-year, driven by strong refining margins. BHEL’s revenues (not part of the sample) fell 22% year-on-year while profit fell 50% with Ebitda margins crashing 700 basis points; the year-on-year numbers are not strictly comparable because of the BHPV merger. In a recent interaction, ABB is understood to have indicated to analysts it didn’t see demand picking up from the private sector or state electricity boards.

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