The India-listed companies have enjoyed just two quarters of recovery from the dip to burnish their top and bottom lines. Already, they are facing a fresh set of challenges from hardening commodity prices and rising wage rates in a global economy convulsing spasmodically between recovery and downturn. As the results for the quarter ended September trickle in, the numbers show the impact has spread to both companies in manufacturing and services sectors. An FE analysis of 42 companies (excluding banks and financials) show that net sales are up 17.5% year-on-year, a shade better than the 15% year-on-year growth seen in the June 2010 quarter, but those have been overtaken through the contraction in operating profit margin. Brokerages have already started earnings downgrades for FY 11 from 28% to 26% and the benefit of low base effect would come to an end in the second quarter of this financial year. The subsequent quarters of FY11 may see further moderation in growth rates. Moreover, higher input costs like primary products, wages and fuel have forced most manufacturing companies to undertake stringent cost-cutting measures. Going ahead, global commodity prices are likely to be the main determinant of both the direction and scale of future earnings upgrade/downgrade of Indian companies.
As the growth drivers for the markets are shifting from some of the one-off factors like the government stimulus to more structural factors like capex plans, macro-economic dynamics will now play a major role in earnings growth, which, in turn, is going to underpin returns from our equities market. Even globally, stock markets are playing the hide-and-seek game with world stocks turning sweeter one week and bitter the next. As the relative growth rates are much higher in the emerging countries as compared with the developed world, the portfolio shift in money from the developed world to the emerging world will continue. This is likely to be a cyclical and structural process, where at times the markets will get overvalued and at times it will correct. In the long run, one needs to focus on the fundamentals of companies and a combination of price to book relative to return on equity should give an investor a good idea of where the value is and the companies that are delivering shareholders? returns rather than just top line growth.