Earnings season is round the corner and it looks like growth has been somewhat slower in July-September quarter. At least, that?s what the first set of estimates says. For its universe of companies (ex-oil and gas), brokerage IDFC SSKI expects profit to grow at 23% y-o-y in the three months to September 2010, compared with 27% y-o-y in the June 2010 quarter and 54% y-o-y in the March 2010 quarter. According to IIFL, aggregate operating margins, for its universe, could come off by about 180 basis points in the wake of input cost pressures while headline profit growth would grow by 5% y-o-y.
That doesn?t sound too exciting but the market doesn?t seem to care. Indeed, despite the several bits of not-so-good data that have come in over the past week, whether it was the anaemic core sector growth of 3.7%, the widening trade deficit, the record current account deficit for the June 2010 quarter at $13 billion or food inflation at 16.44%, the markets continue to remain resilient; the Sensex is just 400 points short of its all time high of 20,873.
The rise in steel prices, clearly inflationary, could mean a hike in key policy rates by the central bank in early November. And banks will have no option but to increase deposit and loan rates; while that may not mean costlier loans for all borrowers, money is clearly becoming more expensive.
Also, since interest rates are headed up and growth may not quite sustain at the kind of pace one expects, HSBC points out that the ?narrow tax base at 10% of GDP remains a major source of vulnerability, while a lot more spending is needed to improve infrastructure over the coming years.? That apart, it?s worrying that the trade deficit keeps widening even in the absence of a rise in crude oil prices. A more immediate concern is that exporters? earnings will be hit now as the rupee is on the wrong side of Rs 45. Exports of goods and services account for about 21% of the country?s GDP, which while lower than the average of about 40% for other Asian economies, is not insignificant.
The good news is that farm incomes are expected to remain strong and boost rural discretionary spending; Bank of America has upped its autumn farm income growth forecast to 25% from 12% earlier given chances of a better-than-expected harvest. It may help bring back pricing power the absence of which was reflected in the fall in gross margins in the June 2010 quarter.
The other bit of good news is that expenditure on infrastructure is picking up and the additional $5 billion that foreign investors can invest into debt paper issued by infrastructure companies will help keep borrowing costs in check. Although there may be some moderation in earnings over the longer terms, India Inc?s earnings growth will no doubt be higher than that of most economies across the globe. And that?s what foreign investors are betting on; an increase in global risk appetite ensured that flows into country funds were positive in the week to September 29, 2010 including Global Funds. Moreover, net cash into all emerging market equity funds increased to 0.69% of assets under management compared with the four-week average of 0.54%. Needless to add India got its fair share.