Apart from falling prices, even volumes not growing
The September earnings season isn’t expected to deliver any blockbuster performances, and even before the numbers have started trickling in, there are predictions of downgrades. It is not surprising expectations remain tempered—net profits for the Sensex set of companies are expected to fall by about 3% y-o-y—because evidence on the ground suggests consumer demand remains dull and investments aren’t really picking up. Factory output in the four months to July has averaged a growth just 3.5%, exports fell for the ninth straight month in August, the value of stalled projects increased in the September quarter, passenger car sales have risen just 6% in the six months to September, and credit offtake remains subdued at sub-10%.
By all accounts the investment cycle, which peaked in Q2FY12 at 35.1% of GDP, is yet to turn, and while the government is trying hard to spend its way out of trouble, the private sector isn’t quite ready, or in many instances, unable to commit capital. Given there is ample capacity lying unused and the fact that both local and global demand could remain weak for at least a year, there can be no compelling reason to add capacity immediately. Under the circumstances, it is unlikely that order books at engineering firms would have grown meaningfully; while Larsen & Toubro has managed to get by with business overseas, BHEL’s order book has been flat for more than a year now. Little activity in the construction sector would have kept sales of steel and cement sluggish, and given how prices of metals have collapsed, profits of virtually every player would be under severe pressure. Softer prices of commodities will, however, help keep the raw material bill down for India Inc and boost operating margins.
Toplines, however, could stay flat, partly because prices of commodities have come off. While that is understandable, what is worrying is that there seems to be virtually no momentum in volumes; volumes for two-wheelers in the six months to September, for instance, have stayed flat. One brokerage forecasts aggregate sales for the Sensex companies will contract for the fourth consecutive quarter. Indeed, sales of passenger vehicles have been lacklustre, primarily thanks to limited purchasing power in rural markets which can be attributed partly to very small increases in the minimum support prices. The full impact of the sub-normal monsoon of course would be known in the next few months as the harvest begins. In the meantime, India Inc’s performance will be mediocre—a fact the Street appears to be ignoring in the hope the recovery will take place soon. Bank of America Merrill Lynch believes that while consensus is pencilling in an earnings growth of about 16%, this could get revised to 8-10%. Right now, that seems a possibility.