Real corporate earnings recovery two years away: India Ratings

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January 14, 2016 10:56 PM

Corporates will take at least two more years to report accelerated earnings and reach the peak level achieved in 2011-12, India Ratings said.

Corporates will take at least two more years to report accelerated earnings and reach the peak level achieved in 2011-12, India Ratings said.Corporates will take at least two more years to report accelerated earnings and reach the peak level achieved in 2011-12, India Ratings said.

Corporates will take at least two more years to report accelerated earnings and reach the peak level achieved in 2011-12, India Ratings said.

The ratings agency added that it is all the more crucial for enhanced public spending to drive growth till corporate earnings recover fully.

If the government decides to go for fiscal loosening in the Budget, the BSE 500 companies can achieve 12-14 per cent pre-tax profits, it said in a statement.

However, it was quick to add that fiscal loosening is not its base case expectation, and in such a scenario, earnings will dip to single-digits.

“We expect EBITDA growth to be slightly ahead of nominal GDP growth in FY17. But a sustained improvement to the post-global financial crisis period (FY10-FY12) growth of 17-22 per cent is unlikely till FY18-FY19,” it added.
To achieve recovery in earnings, an improvement in nominal GDP in 2016-17 is required, it said.
An improvement in corporate earnings to FY12 levels is unlikely due to low nominal GDP growth of 7.4 per cent for the first half of the fiscal, it said.

Interestingly, illustrating the importance of public spending, it said the growth in corporate earnings hinges on the fiscal deficit roadmap adopted by both the Centre and states.

A single-digit growth in deficit could result in earnings growth falling below 10 per cent in FY17, it explained.
It can be noted that recommendations of the Seventh Pay Commission, which can push up the fiscal deficit by 0.7 per cent as spends on salaries increase, has led to intense speculation on the strategy to be adopted by the finance minister on fiscal consolidation.

Many analysts are recommending a relaxation on the 3.5 per cent fiscal deficit target for FY17 to support growth.
Falling exports due to the fall in global commodity prices and currency falls would continue to pressurise corporate profits, it said.

Exports fell 0.4 per cent in FY15 and have dipped by 13.1 per cent over April-November 2015.

The agency said it expects exports to post mid-single- digit fall in FY16, but a marginal rise in FY17 on low base.
On a sectoral basis, it said investment and commodity prices linked sectors will post muted EBITDA growth in FY17, and so will metals, mining, and upstream oil and gas companies despite the favourable base effect.

Downstream oil and gas companies will report positive growth, but sectors which are crucial for raising corporate earnings graph are auto and automotive suppliers, power (generation, T&D) and telecom, which account for around 60 per cent EBITDA of BSE 500 companies.

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