It is not too surprising that Nifty?s threatening to slip below the 5,300 mark or that the Sensex fell below 18,000 on Tuesday. The growth estimates put out by the government aren?t anything to cheer about because they indicate a slowdown in the economy in the second half of 2010-11. Since the market?s looking ahead at 2011-12, it?s worrying that economists have already pared their estimates. Almost everyone?s now convinced that the growth in GDP could actually turn out to be lower in 2011-12, at closer to 8%, than the 9% number that was being looked at six months back. As Samiran Chakraborty at Standard Chartered observes, ?Our concern about a slowdown in the second half of 2010-11 has been proved correct and so we have lowered our GDP forecast for 2011-12 to 8.1% from 8.8%.?
As Chakraborty points out, the slower GDP growth of 8.3% in the second half of 2010-11 is being led by slower industrial growth. And the biggest concern is that fixed capital formation, after rising a smart 15% in the first half of 2010-11, will grow in just single digits in the second half.
That the economy isn?t exactly roaring can be seen in the results that corporate India has reported for the three months to December. Many of the manufacturing companies have posted weak top lines and consequently have not been able to combat the inflation in input costs. Or to put it another way, they haven?t been able to pass on the higher cost of raw materials.
For a clutch of 1,615 companies (excluding banks and financials), revenues in the three months to December 2010, have risen 22 % year-on-year. That may seem fairly good but one would do well to remember that it was a fairly inflationary quarter.
Moreover, with margins crimped, net profits for the sample have risen just 12%. In fact, the numbers are worse if looked at for a smaller universe; Nomura reports that for a sample of 72 firms, operating profits have risen just about 10% year-on-year while net profits are up an anaemic 6.8% year-on-year.
Across sectors, most of the larger companies including Bharti Airtel, Hero Honda, Tata Global Beverages, Ambuja Cements and Cipla have turned in numbers that were below estimates. Unless prices of commodities come off sharply and inflation retraces meaningfully, it?s clear now that earnings are unlikely to grow by the anticipated 20% in 2011-12. And although sectors with a larger weightage in the indices such as banking or oil and gas may fare better than others, the rapidly deteriorating macroeconomic environment has put a question mark on profits in these spaces too. High inflation may help the top line but as seen from the December 2010 quarter numbers, few companies have pricing power, especially in mature categories.
Earnings estimates for the Sensex for 2011-12 have already been trimmed by about 1.4% but there could be room for further cuts. So, although at 17,776 the markets may be trading at around 14.4 times estimated 2011-12 earnings, any more downgrades will make it a little more expensive. More important, profits of smaller companies are likely to take a bigger hit since they have less bargaining power and are more hurt by rising interest rates. So, while the markets may have given up 13.3% since the start of the year and may have underperformed its peers, it sure hasn?t bottomed out.