Double-digit earnings growth expected

For India’s leading companies, earnings growth is expected to remain stable in the July-September quarter of the current financial year.

According to analysts polled by Bloomberg, the earnings of the 30 companies on BSE’s Sensex (excluding financial ones) are expected to grow at a double-digit rate — at around 11 per cent on a year-on-year basis — in the July-September period of this year.

Over the past four quarters, the Sensex companies’ earnings trajectory has improved sharply because of a weak rupee. Though the Indian currency has recovered from the lows it hit in August last year, the Sensex companies’ earnings growth momentum has not been affected, say analysts.

On revenue growth, the majority view is largely optimistic. While the Bloomberg poll shows the Sensex firms’ revenue might grow only three per cent from the same period a year ago, Kotak Institutional Equities expects 7.5 per cent increase.

If oil & gas companies are excluded, the rate of revenue growth might be even higher — at 10.9 per cent. That is because analysts are assuming zero compensation to oil marketing companies in the September quarter, besides subdued refining margins, forex fluctuations and inventory losses.

For the entire universe of companies, Antique Stock Broking is even more bullish. It says revenue growth during the September quarter will be led by pharmaceuticals (19 per cent, year-on-year), mid-caps (17 per cent), FMCG (16 per cent), financial firms (13 per cent), automobiles (13 per cent), and information technology (11 per cent).

However, like in the April-June quarter, earnings growth might remain depressed for industrials and utilities.

Dalton Capital Advisors Managing Director U R Bhat says the numbers for the three-month period are likely to be a repeat of the previous quarter, with improvements for companies in segments like information technology and automobile. The leading firms are on course for overall growth of 10-12 per cent this year, he says.

Good news is that a lot more sectors are expected to show recovery in sales and earnings this year than the previous year, when only export-oriented companies fared well on the back of a weak rupee.

A robust performance by fast-moving consumer goods, pharmaceutical, information technology and automobile companies is expected to drive growth. The automobile sector, with a revival in volumes since May this year, is expected to see a sharp

improvement in margins on better operating leverage and lower input costs. So far this financial year, in volume terms, passenger cars have seen seven per cent annual sales growth. Analysts expect the sector to report an improvement of 130-150 basis points in operating margins, as raw material costs have declined.

Reliance Mutual Fund Chief Investment Officer Sunil Singhania expects the coming result season to be better, with profit margins beginning to inch upwards. IT, pharma, auto, consumer durables and cement companies could lead, he says.

PSU banks, according to Singhania, might disappoint, given their slow credit growth and exposure to some large companies in trouble.

Banks, analysts say, might report strong earnings growth of 28 per cent over the September quarter of last year. A large part of this would be driven by factors that affected their earnings between the September and March quarters of 2013-14. Higher provisions and lower treasury income had hit banks’ earnings last year. The net interest income of public-sector banks might slow down on weak loan growth but it is expected to be stable for private banks.

Even if all sectors are not showing a uniform recovery in earnings, the long-term outlook on corporate India’s earnings trajectory remains robust. Bank of America Merrill Lynch says: “We are at the trough of the earnings cycle, with both sales growth and Ebitda (earnings before interest, tax, depreciation and amortisation) margins at close to trough levels. Sales growth, as well as margins, in 2013-14 was the fourth-lowest in 20 years. If these revert to mean over the next four years, we will see a doubling of earnings growth.” The five-year period to 2012-13 has seen earnings growth of eight per cent; this is likely to return to the double-digit level seen between 2000-01 and 2007-08.

There, however, are some who have a contrarian view. Dhananjay Sinha of Emkay Global says “the year-on-year impact of the rupee’s depreciation will wear off in the (July-September) quarter, lowering revenue and profit growth across manufacturing sectors. The impact will be felt the most in export-driven ones like IT, pharma and automobile. A weaker rupee had raised pricing power (in rupee terms) for companies across many sectors, raising profit margins. This benefit will not be there, unless the rupee falls further from its current level”.

Domestic demand and capital expenditure-related sectors, such as capital goods, construction and commercial vehicles, are likely to again be laggards, given a weak demand in the domestic economy, Sinha adds.