Another earnings season is upon us. By this time next week, Infosys would have told us how it?s coping in a tough-but-recovering environment and how it thinks it will fare in the near future. The March 2010 quarter was a reasonably good one for India Inc notwithstanding a few disappointments from heavyweights like Reliance Industries and Maruti Suzuki. For a sample of 2660 companies, excluding financials and oil, net sales were up nearly 28% y-o-y though the operating profit margin (opm) came off by about 250 basis points to 15.3%, the result of raw material costs rising by close to 800 basis points. If net profits rose a strong 34%, it was the partly on account of lower interest costs, more other income and, sometimes, one-off gains.
But that?s in the past and looking ahead there seems to some amount of anxiety. Citigroup estimates that earnings growth, in the June 2010 quarter, for the Sensex set of stocks (ex-oil) should be about 16% y-o-y, rather disappointing when compared with the 23% growth in the March 2010 quarter. Given that estimates for 2010-11 are far higher at 27%, there will be a lot of catching up to do. The estimate of 19% for Citigroup?s broader universe of stocks too isn?t comforting either. The estimate put out by Kotak Securities, for its universe of stocks (ex-energy), of just under 26% y-o-y, however, is more exciting. For the Sensex (ex-energy) too, Kotak has put out a far more heartening growth number of 28.7%.
There seems to be general consensus that although top line will be fairly strong, there could be some deceleration. A 20% or so increase in net sales should not be difficult for India Inc to achieve even if prices of metals have corrected because automobile firms have done brisk business turning in strong volumes. However, it?s possible that FMCG firms would not have been able to push through the kind of volumes that they may have liked, given the high level of inflation, although purchasing power remains strong in the smaller towns. It?s also unlikely they would have seen any pricing power. Also, cement prices have been coming off for the past two months and that together with the fact that volumes won?t be too exciting thanks to the onset of a timely monsoon, could cap the turnover for that space. Operating margins for India Inc could continue to be under pressure because although prices of commodities such as steel may have eased, it will be some time before the existing contracts expire. Also technology firms may see some impact on their costs because of higher wage bills.
Any signs of earnings growth tapering off significantly, cannot be good news for the market because at 17,615, the Sensex trades at 16 times 2010-11 earnings, which although not expensive isn?t cheap. As has been pointed out, Sensex earnings for in 2010-11 are heavily weighted in favour of commodities. That apart, only a major global problem can hurt business in India. So far this year, India has picked up a big chunk of foreign inflows into the region with investors betting on sustained growth in the economy and the corporate sector. But for India to continue to see such strong flows, the numbers have to add up.