Q4 earning may fall so FY14 GDP growth critical
Whether it?s cars, capital goods or cement, business has been dull in the three months to March. Which is why it is not surprising that earnings expectations, for the last quarter of FY13, are tempered like never before. CLSA, for instance, estimates that earnings, for the universe of companies that it tracks (excluding oil and gas), will drop 3.5% yoy, the first time since September 2009, while Kotak Institutional Equities estimates that earnings for the Sensex set of companies will contract 1.8% yoy.
While FY13 was a tough year for India Inc?reflected partly in the anaemic growth in factory output that clocked just 1% in April-February FY13 and that too on a low 3.4% yoy in the corresponding period of FY12?a lot depends on how economic growth picks up in FY14. Most economists are looking at a sub-6% number for FY14?while that?s poor, it?s higher than FY13?s likely 5%. Right now, however, confidence is running low, so even if the government does move ahead on policy initiatives such as a price pooling policy for coal imports, it could be a while before corporates, currently struggling to generate cash flows from existing operations, consider investments in new capacities. The most anxious are bankers, wondering who they?re going to be lending to in FY14; if assets grew 14% last year it was on the back of a fairly strong project pipeline built up in FY11 and FY12, but that is now nearly empty.
Which is why, despite the advantage of a low base, it?s possible that once Q4 earnings numbers start coming in, we may see another round of downgrades for Sensex earnings. Right now, projections are for around 15% FY14 growth, but this could fall to around 10% after Q4 numbers come in. If FY13 earnings for the Sensex come in at around R1,200, this means the number for FY14 could be in the region of R1,300. At a Sensex of 18415, this means markets are trading at a one-year forward price-earnings multiple of approximately 14 times, a shade cheaper than the historical average of 14.5 times. That could be one reason why FIIs continue to buy into Indian stocks?they?ve invested more than $10 billion between January and now, though the bigger reason of course is that they?re flush with funds. If the economy picks up?SIAM?s projections of commercial vehicles growing 7-9% in FY14 after contracting 2% in FY13 suggests modest growth?the earnings downgrades expected after Q4 results are out could be the last for a while.