Despite some favourable trends, especially the weakening currency which will help exporters, the Street is not particularly hopeful of a strong bounceback in corporate earnings for the April-June quarter. The January-March period saw profits for the Nifty companies fall by 9% y-o-y despite a helpful base effect and elevated commodity prices. This time around too, growth will come off a weak base since the same quarter in 2017 had seen a fair bit of de-stocking ahead of the rollout of the GST. As seen from the big jump in the sales volumes for automobiles, the impacts of demonetisation and GST appear to have tapered off and manufacturers will surely post a sharp jump in profits. Moreover, exporting firms in the IT and pharmaceutical sectors will benefit from the weaker rupee which hit a new low towards the end of Q1FY19. In the January-March quarter, the entire metals pack did well as many swung from losses to profit; this time too they will do well, since prices remain firm. However, the sharp jump in the prices of oil and its derivatives would push up costs for a host of companies, pressuring their operating margins. At 13.6%, the operating profit margin for a sample of 1,528 companies in Q4FY18 was the lowest in at least eight quarters; this time too, profitability could be under pressure.
To be sure, demand for goods and services is picking up especially because there is a lot more cash in the system than there has been for a long time. Purchasing power in rural India remains reasonably strong as reflected in the sales of tractors and two-wheelers. Ahead of the general elections, the government has started spending on rural schemes. In urban India, too, higher salaries for government employees, and higher levels of cash, should have boosted consumption. With an increasing number of affordable housing projects being rolled out and road construction in full swing, demand for materials such as steel and cement should have picked up. However, in the last six months, not too many companies have been able to pass on the costs for fear of hurting their volumes. Only businesses that have very strong brands have been able to raise prices. Instead, as they have been doing for nearly two years now, companies are attempting to protect their profits by operating more efficiently and reining in costs. Among the sectors that will continue to fare poorly are telecom where the severe competition and sharp fall in mobile telephony tariffs have already bruised the balance sheets of companies. Public sector banks too are likely to do badly thanks to higher loan loss provisions and mark-to-market losses on their bond portfolios. The poor fuel linkages will leave the results of utilities lacklustre while results from the real estate sector too should be ordinary.
Going by the capex data for the June quarter, which reflects a sharp fall in new government projects, it is unlikely the engineering sector will do too well, though the weak performance of the last couple of years could help it show some revival. Data from CMIE shows investments by the private sector also remain weak though there has been a marginal fall in the number of stalled projects. A strong revival in corporate earnings will require investments by private sector companies to make a big comeback. So far, there are few signs this will happen in 2018-19.