Early corporate results have had some sighs of relief, notably Reliance Industries? declaration of enhanced refining margins, but this season?s earnings story is chiefly one of disappointment. Overall, there are clear signs that India Inc?s heady eight-quarter earnings growth party is over. As the hangover sets in, one can only hope it will not be too long. An assessment of the results of around 100 companies shows that net earnings for Q4FY08 are just about 9-10% higher than that of the same quarter the previous year. This is the lowest growth rate recorded over the past eight quarters. If this trend continues, it will disappoint even those research analysts who have already scaled their forecasts down. For FY08, for example, estimates have been clipped from a robust 17% to 13-15% already. In any case, manufacturers operating at peak capacity?the result of the boom?cannot maintain margins as input costs rise without making substantial capital expenditures, and the investment outlook is no longer as strong as it was. Earnings, therefore, are bound to suffer, and the stockmarket seems to have factored all this in to its revised valuations of the recent past.
Also note that treasury operations accounted for significant profit chunks of at least a quarter of a sample of 3,000 companies?other income contributed around 39% of their profit-before-tax in the previous quarter, but the latest quarter?s slump has lowered that figure. More bad news could be on its way. The fear is now palpable. Almost every other company?s results are lower than previous projections, and underperformance is likely to be the story once all the numbers are in. There may be bad news in banking. Some of the smaller private sector banks may have turned in smart numbers, but the damage on the derivatives front is yet to reveal itself fully. The results of cement and steel companies would be watched closely, not least because of the ?cartelisation? word in the air. On the whole, however, talk will move towards how long the slump will last. With inflation raging, interest burdens are likely to increase. The hope is that larger scale will make up for some of that. On the anvil are plans for some 8 million tonnes of new steel capacity, similar expansion in cement and 40,000 mw of power generation. India desperately needs additional capacity in these three sectors. Let?s hope rising capital costs do not come in the way.
