Corporate earnings for the last quarter of FY16 will start trickling in next week, but once again it’s unlikely to be a performance that most in the markets will cheer. The results, however, need to be judged against the backdrop of the challenging environment, both at home and overseas. Had the environment been even slightly more helpful, softer commodity prices would have benefited a whole host of user industries, giving them better operating leverage and driving up operating margins. However, in the absence of too much investments in either fresh capacity or brownfield ventures, as also limited construction activity, not only has demand for capital goods been subdued, consumption spends too have been on a leash. The pace of order inflows at Larsen and Toubro, for instance, has been slowing in the current year—down 13% in the nine months to December—compelling the management to leave its guidance muted. Consequently, revenues and margins are expected to be under pressure in the last quarter. The story isn’t expected to be very different at other engineering goods companies, with most of them expected to report weak order books and relatively poor execution.
A good indicator of how listless the economy is can be found in sales of cement companies; while volumes are estimated to have fallen by some 5-7% year-on-year in the three months to March, prices have either stayed flat or fallen depending on the region. Another good indicator of activity in the economy is the construction space; property companies are tipped to report very ordinary sales numbers for the quarter, and given that the number of launches remains low, it doesn’t look like there’s a rush for homes, not even in good markets like Bangalore.
The weak rural economy, following two poor monsoons in particular, has hurt demand for goods such as two-wheelers; Hero MotoCorp sales in FY16, for instance, at 6.63 million, have been flat, while sales of tractors at Mahindra and Mahindra are lower by 6%. However, there are some bright spots; volumes of commercial vehicles and passenger cars have been fairly strong, so both Maruti and Tata Motors should report reasonably good numbers. To be sure, expectations are tempered; profits for the Sensex set of companies are expected to grow 5.7% year-on-year, according to Kotak Institutional Equities, on the back of a rise in revenues of 9.5% and stable operating margins of just under 18%. However, for the larger universe of stocks that the brokerage tracks, they are estimated to stay flat, with revenues growing at a shade over 5%. The numbers would have been better had it not been for the fact that several state-owned banks will report losses; following the mandated clean-up of their balance sheets, they will necessarily need to make higher provisions for loan losses and emerging stress. PSU lenders are expected to collectively report a steep drop in profits of an estimated 80%. The provisions could have been cushioned by a good increase in the top line, but loan books have not really grown, especially the corporate piece. In fact, it’s the high leverage that’s weighing down much of India Inc, and unless a good chunk of that debt is shed, it’s hard to see any meaningful uptick in investments.