Earnings remain poor across the board
Despite the most tempered expectations, earnings for the December 2014 quarter were so disappointing that estimates for not just FY15 but FY16, too, needed to be trimmed by around 3.5-4%. In an indication of how weak demand is, whether for consumer and capital goods, and how pricing power seems to have been altogether eroded, the top-line growth, for a sample of 3,008 companies (excluding banks and financials) net sales grew by just 0.4% yoy. Companies such as Hindustan Unilever opted for price cuts since volumes were not picking up as anticipated. And although the tax outgo was smaller, net profits collapsed by 26% yoy.
That corporate India’s performance is so poor at a time when prices of almost all commodities have come off by 30-40% and crude oil prices are down by 50% from their peak is more than worrying and suggests there are serious structural issues that need to be sorted out before a revival can begin—the lack of fuel linkages for power plants, for instance. Any talk of capacity addition appears premature, partly because there is enough spare capacity across sectors and partly because industry is so apprehensive of changes in regulation. Also, given how so many companies are fighting tax cases, the environment for expansion is hardly encouraging. While commentary from corporates has been cautious for close to two years now, the likes of a Larsen & Toubro toning down the guidance for order inflows to 15-20% from 20% earlier, makes it clear the turnaround in the economy could take far longer than expected. Indeed, bankers who are getting very few proposals for capex funding say it could be several quarters before demand for project finance picks up; SBI’s loan growth in Q3FY15 was just 7.3% yoy. For demand to pick up meaningfully, the capex cycle has to turn since it is the manufacturing sector that will create jobs and, consequently, demand.Since there is little sign of that, it is no surprise that Kotak Institutional Equities forecasts earnings for the Sensex set of companies will stay flat year-on-year for the three months to March. The numbers will be dragged down by companies in the metals and mining space as also utilities and automobiles with pharmaceuticals and IT companies continuing to fare well. Given steel prices aren’t about to recover in a hurry and fuel linkages aren’t likely to be in place soon, it is surprising analysts are pencilling in a 16-17% growth in earnings in FY16. Even though the base is low, it doesn’t look like corporate profits will grow by more than 13-14% next year. An overly-leveraged corporate sector that is low on confidence can’t be expected to deliver more than that, especially now that the rabi harvest will be less than bountiful.