While earnings season has got off to a good start with Infosys beating the street, it might just end with a whimper. To be sure expectations aren’t high; net profits for the Sensex set of companies are estimated to remain flat y-o-y if not fall slightly and, even excluding energy stocks, profits will grow by just about 5% y-o-y. Much of the earnings growth will probably come from cost compression because sales are tipped to be sluggish. One estimate, by Kotak Institutional Equities (KIE) puts sales growth by about 4.5%
y-o-y for the universe of companies that it tracks. On the other hand, CRISIL estimates that revenues, for a much bigger sample of companies, will decelerate 7% y-o-y. Some of this has to do with the prices of commodities being softer—top lines of steel and petrochemicals makers, for instance, could be under pressure in the absence of an adequate increase in volumes. But revenues will also show moderate growth because there are no longer any major gains to be had from a weaker rupee. Even otherwise, since the demand environment remains weak, both for capital goods and consumer durables—data from the automobile sector hasn’t been particularly encouraging even though October was a festive month—sales numbers are likely to be unexciting. While tepid loan growth suggests there isn’t too much investment taking place, order inflows into capital goods companies could be better than in the last quarter. That then would be the highlight of the earnings season, given order books have remained depressed for more than a year now. While the top line growth may be modest, the lower prices of commodities will help users save on raw material costs—which is why operating margins could move up by about 25-50 basis points, though not evenly across sectors. Some segments of the economy, roads for instance, are expected to report an increase in margins of over 300 basis points y-o-y this time around, since traffic volumes have picked up across the country and they have also benefited from higher toll rates.
In a slowing economy, banks have found the going tough with loan growth averaging 11-12% in the last few months. While some have managed to reduce funding costs by dropping deposit rates, yields, too, have been under pressure in a competitive environment. However, thanks to a sharp drop in bond yields, most of them will make bumper treasury profits which will drive up bottom lines meaningfully.
Even if the numbers for Q3FY15 come in above expectations, it is unlikely they will be good enough to meet the consensus estimate of a 14% growth in earnings for FY15; for that to happen earnings need to grow 17% in H2. As for FY16, the current consensus of an 18% increase looks like a tall ask, even off a low base. Even if investments takes off meaningfully in the next few months, the impact on the earnings of corporates is unlikely before FY17.