The first lot of results from this season?s crop has been, to say the least, disappointing. Not only have many of the numbers for the three months to June come in below estimates, the management commentary, too, with a few exceptions, has been less than cheerful. Despite the promise of a new government speeding up reforms and cutting the red tape, corporate India realises it is going to be a while before demand picks up and it acquires pricing power. The performance of banks is particularly revealing; loan growth has been subdued while fee income has been flattish reflecting little appetite from industry and retail borrowers. At HDFC Bank, for instance, loan growth came in at 21% but the retail portfolio grew at just 7% while at HDFC, home loans to individuals grew at a slower pace of just 17% yoy compared with 20-24% between Q1-Q4FY14, all of which suggests consumer confidence isn?t quite picking up. Moreover, given the Axis Bank management?s observation that there is impairment pressure emerging, primarily in the SME and mid-corporate space, smaller companies are clearly struggling to make ends meet. Larger firms too are grappling with a host of issues; in the case of Ultratech, the cement manufacturer?s realisations dropped 5% yoy to R4,792 per tonne, despite a price hike in southern India, wiping away benefits from higher volumes and resulting in the firm?s operating profit falling 4% yoy. There are pressures across sectors?Reliance Industries profits were boosted by lower fixed charges and lower interest costs while a top line growth of just 7% left Bajaj Auto unable to defend higher raw material and employee expenses. The core of the economy remains stressed; Reliance Infrastructure?s revenues dropped 24% yoy driven down by sales from the EPC division.
Given how the macro environment is far from supportive?inflation remains elevated while interest rates are high enough to dissuade companies and individuals from leveraging?it doesn?t look like India Inc?s profits will grow in high double digits anytime soon. Indeed, given the government?s Plan expenditure could be pruned to help it rein in the fiscal deficit?a move that would further delay the turn of the capex cycle and leave the economy depressed for a longer time?cash flows are likely to remain strained. Right now, the aggregate earnings are being bumped up by profits of the IT majors?profits for a sample of 112 companies, excluding TCS and Infosys, were up less than 5% in the June quarter. The monsoon remains a dampener with the sowing area down more than 40% and the cumulative shortfall in precipitation, for the season, at close to 30%. It is early days yet but the Sensex earnings estimate of R1,505 for FY15 seems to be under threat.