Earnings have bottomed, budget to provide future direction

February 16, 2015

(Any opinions expressed here are those of the author and not necessarily those of Thomson Reuters)

With the third-quarter earnings season almost over, it is now clear that December quarter was among the worst in the past two years.

Profit growth was the lowest in five quarters with the aggregate net profit of 2,941 companies declining 16.9 percent. Even after adjusting for one-offs (or extraordinary transactions), profit was down 6.3 percent over the year-ago period. Sales growth was also the weakest in 12 quarters.

For Sensex companies, net profit was down 6.5 percent year-on-year, their weakest show in six quarters, with a 2.2 percent decline in sales. Seventeen companies in the benchmark index reported profits that were short of Bloomberg consensus estimates. On an aggregate basis, Sensex profit was 7.5 percent lower than estimates.

For the first nine months of FY15, Sensex companies reported PAT (profit after tax) growth of 7.4 percent whereas the average quarterly earnings growth since Q1 FY09 had been 8-10 percent.

Public sector banks saw pressure on their profits in the December quarter as asset quality worsened due to restructured assets turning bad. The IT sector did better with a top-line growth of 10 percent and profit rising by 4 percent. The growth was partly impacted by cross-currency headwinds, while demand remained stable.

Volume growth for companies was impacted by a slow pick-up in urban and rural demand, accompanied by weak pricing power. Also, the high base-effect came into play as the festive season demand advanced this year to Q2 compared to Q3 last year. For instance, the cement sector saw healthy volumes of 7-8 percent, but realisations were weak. Persisting low capacity utilisation was also a reason for weak volume growth.

The government has been consistently tightening it purse strings for the last couple of years due to fiscal considerations, and this has affected the investment cycle from picking up as the private sector is unable to push the paddle due to heavy debt. The sharp decline in commodity prices (steel, oil, coal) has put pressure on the top line and bottom line of producers. Companies across sectors like metals, capital goods, infrastructure, auto and even consumer goods disappointed with their performance. Even a defensive pharma sector painted a grim picture.

The full benefits of lower commodity prices – which could not be realised by manufacturers because they were saddled with old inventory – will be visible from March quarter onwards. This should provide a leg-up to earnings going forward.

The silver lining is that a majority of companies feel earnings have bottomed out and things are looking better, especially with interest rate cycle on the downward trend and the central government working proactively on economic reforms. The union budget on Feb. 28 will provide a signal on where we will be heading in the next fiscal, and more so in the medium term.

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