If the euphoria over a stable government died down quickly on Thursday it’s because corporate earnings are at their worst in years and there’s little chance of a recovery in 2019-20. Indeed, as this paper has repeatedly noted, the broader market has been in a bear grip for close to a year now. Close to 68% of the stocks with a market capitalisation of `1,000 crore have lost value over the past year. Before the rallies on May 17 and May 20, this ratio was a higher 74%.
The surge in the Sensex over the last two years of 28% — powered by just six stocks — has masked the widespread losses in the market especially in the mid-cap and small cap stocks. The underperformance is the result of anaemic corporate profits in the wake of disruptions due to demonetisation, GST and in general, a slowing economy. The economy has slowed over the last four quarters and is expected to grow at just 6.5% in Q4FY19, the slowest pace after the June, 2017 quarter. Consumption demand is flagging as seen in the volumes reported by FMCG firms and in the subdued sales of cars and two-wheelers. Moreover, corporate India remains leveraged – since cash flows have been crimped.
Most of the cash available for investment is on the books of consumer-oriented companies that typically don’t make investments in infrastructure.
With sectors such as power and telecom in deep trouble and the NPA cycle not turning just yet, corporate India has little but a low base going for it.