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For the Street, this earnings season’s the worst in 10

The current earnings season has turned out to be the worst in the last two-and-a-half years, although Sensex companies have delivered results pretty much in line with expectations.

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The current earnings season has turned out to be the worst in the last two-and-a-half years, although Sensex companies have delivered results pretty much in line with expectations.

Slower sales growth and persistent margin pressures have resulted in the broader market, represented by companies that make up the BSE-500 index, reporting the lowest profit margins in 10 quarters and the fourth consecutive quarter of negative earnings growth.

An analysis of quarterly numbers declared by 397 BSE-500 companies (excluding financials and state-run oil marketing companies), which represent more than three-fourths of the total market capitalisation, shows that the net profit margins stood at a 10-quarter low of 7.6% while the aggregate net profits too declined 7.9% in the June quarter.

Earnings growth had fallen by 2.9% in the March quarter, 8.2% in the December 2011 quarter and 2.2% in September 2011 quarter.

The subdued performance in the broader market is in sharp contrast to that of the Sensex constituents.

“Headline profit growth came in at 14.6% — slightly ahead of our estimates of 13.7% but Ebitda (earnings before interest, tax, depreciation and amortisation) growth was less than 5%. However, excluding financials, earnings were subdued at 6.5%. Also, as expected, aggregate sales growth for Sensex companies came in at 17.7%, in line with our estimates,” wrote Jyotivardhan Jaipuria and Anand Kumar, analysts at Bank of America Merrill Lynch, in their results review on Friday.

Despite better earnings growth reported by Sensex companies, the margin pressure continues for them as well.

“Ebitda margins at 15.8% came in at an eight-year low. The good news was that ex-commodity margins have bottomed. We think margins may be close to bottoming out,” wrote the duo at BofA Merrill Lynch.

Dhananjay Sinha, co-head, institutional research, at Emkay Global Financial Services, believes the broader corporate universe continues to witness margin pressure due to elevated input costs and a sharp drop in sales growth.

“By and large, results have been weak for broader markets. According to our estimates, there has been a 200-250 basis points year-on-year decline in operating margins and most likely BSE-500 companies will report third straight quarter of negative earnings growth,” he said.

For the BSE-500 companies, sales during the quarter grew 13.1%, the lowest in the last 10 quarters, while expenditure surged 15.3%, squeezing operating profit growth to 2.5%.

Economic slowdown has hit revenue growth badly and lower operational leverage has hit profitability, said Dipen Shah, head of private client group research at Kotak Securities.

“Infra-related sectors continue to bear the brunt of inertia in policy reforms and the automotives sector has also seen a slowdown in sales. Also, global slowdown has hit volume growth for IT companies and realisations for metal companies,” said Shah.

“At the same time, costs have remained higher due to depreciation in local currency, reduced operational leverage and high interest costs,” he said.

Though the operating margins dipped by 160 bps over last year’s quarter, the net profit margins dipped by wider margin of 170 bps.  This may be due to lower contribution from other income, which grew just 2.4% during the latest quarter.

Sinha believes that other income may have been impacted due to the change in classification of foreign gains or losses, debt restructuring exercise and lower income from sale of assets or investments.

The biggest drag on earnings has come from materials and telecom stocks.

According to the BoA Merrill Lynch report, the number of companies surprising negatively far exceeded those throwing positive surprises.

Experts see the earnings stress for the broader market continuing for at least 2-3 quarters, given the weak macro outlook and cautious management commentary.

“The sound bytes coming from managements are not encouraging as they see weak demand impacting volume growth, pricing power dwindling and continued margin pressure. The banking sector performance is reflecting the pain which the larger economy is going through. Weaker monsoon may put additional pressure,” said Sinha.

BofA Merrill Lynch analysts see more downgrades ahead but at a slower pace. “Fiscal 2013 Sensex  EPS was downgraded again by 2% to Rs1,215. The bottom up Sensex EPS is now close to our long standing top down view of Rs1,200 making us wonder if even we may prove optimistic,” they wrote.

Any indication of growth rates bottoming out would depend on government initiatives and policy reforms to boost infrastructure and investments, say the experts.

“Government needs to rein in fiscal deficit and address supply side issues as well because, though the WPI numbers raise some hopes of a rate cut, core inflation continues to be a dampener and may prevent the RBI from cutting rates aggressively,” said Shah.

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