Economic recovery: Will India Inc get third time lucky?

In both previous upturns after the 2008 global financial crisis, the revival halted within a year

Will corporate India be lucky in its third shot at growth recovery since the 2008 global financial crisis?

The current upturn in corporate profitability and revenue growth is a third cycle of recovery in corporate earnings since the 2008 crash.

On both earlier occasions, the recovery sputtered within a year and growth later hit new lows. Will history repeat itself?

This analysis is based on the quarterly earnings for 724 companies, excluding banks and oil & gas, whose financials are available for the past 45 quarters beginning January-March 2005.

The numbers are on a trailing 12-month basis, to weed out the seasonal factors and quarterly fluctuations in growth.

The first recovery after the global financial crisis was fuelled by the fiscal stimulus of the then United Progressive Alliance government.

It had cut indirect taxes and stepped up public spending and subsidies, to boost demand growth.

The tailwind lasted for a year and corporate earnings peaked in the September 2009 quarter.

The second growth episode started after reaching a bottom in the June 2013 quarter and lasted till June 2014.

It was triggered by a sharp depreciation in the rupee that boosted the revenue and profit growth of top exporters such as Tata Consultancy Services, Infosys, Sun Pharmaceutical, Lupin, Dr Reddy’s and Bajaj Auto, among others.

The current recovery has been driven by an expansion of corporate margins, because of a decline in international energy and commodity prices.

This has expanded operating margins of manufacturing and energy-intensive companies, boosting profitability.

The bulls say the current recovery seems more durable.

“I expect the earnings momentum to continue during the current financial year, driven by a good monsoon and higher public spending by the government,” says G Chokkalingam, chief executive officer, Equinomics Research & Advisory.

Nitin Jain, president & CEO, global assets and wealth management, Edelweiss Capital, is keeping his fingers crossed but remains bullish.

“We are seeing acceleration in earnings but would wait for at least two quarters more to see if the recovery is cyclical or structural.”

In the seven years since FY09, the combined adjusted net profit for the sample has grown at a compounded annual rate of 8.5 per cent; net sales grew at a CAGR of 11.5 per cent. Reported profit growth has been slower, at 5.6 per cent.

This is a far cry from the 20-plus per cent earnings growth for several quarters in the pre-2008 period.

Others, however, caution investors about betting their fortunes on an all-round recovery in corporate earnings.

“The current surge is largely due to gains from lower commodity and energy prices, beside the base effect of low profits last year.

"Gains from lower commodity prices are likely to wear off by the end of the next quarter, and earnings are likely to be back in the slow lane,” says Dhananjay Sinha, co-head institutional equity, Emkay Global Financial Services.

The core operating margin (excluding other income) and net profit margin for the sample are both up nearly 50 basis points in the past three quarters.

A rough calculation shows lower input cost added nearly Rs 18,000 crore to the sample’s combined net profit (adjusted for exceptional items) during the year ended March 2016.

It accounted for nearly two-third of the incremental net profit in the past year.

Dhananjay says sustainable growth in corporate earnings requires strong double-digit growth in revenue.

“Revenue growth remains in single digit and there is little likelihood of quick acceleration there, given demand challenges in various sectors,” he adds.

Combined net sales of the sample were up only 4.6 per cent year-on-year (y-o-y) during the 12 months ending this March.

It was better than the 2.8 per cent y-o-y growth during the December quarter but down from 7.8 per cent y-o-y growth in the year ended March 2015.

Economists agree.

“We expect a slow and long-drawn recovery, given the challenges in various sectors.

"The best case scenario is an uneven recovery, where some sectors such as consumption do relatively better, while investments continue to suffer for some more time,” says Devendra Pant, chief economist at India Ratings & Research.

This could well be the recipe for a new normal where corporate earnings in the longer term remain punctuated by cycles of boom and bust in quick succession.

Image: People look at a large screen displaying India's benchmark share index, on the facade of the Bombay Stock Exchange building in Mumbai. Photograph: Arko Datta/Reuters