Corporate earnings for fiscal 2013 may be lowered afresh

The earnings season that just got over was the worst in the last two-and-a-half years, where net profit slipped more than a third on account of higher input and interest costs.

An analysis of BSE 500 companies shows the aggregate earnings for as many as 405 of them (excluding banks and financial institutions) during the July-September quarter fell 34.4% year on year, with net profit margins sliding to 5.16%, the worst in 11 quarters.

This is in sharp contrast to the performance of Sensex companies (ex banks & financials), which managed to report 5% growth.
Experts said the broader index companies suffered from adverse domestic macro environment and foreign exchange fluctuations even as large companies benefitted from their global exposure.

“The Sensex companies have been able to deliver good numbers with many of them, like export-oriented or technology companies, benefiting from currency depreciation and their resilient growth model. However, the rest of the broader universe has disappointed and is looking troublesome. The broader universe is feeling pressure from slowdown in domestic demand, decrease in pricing power and higher interest costs due to relatively weaker balance sheets,” said Rajat Rajgarhia, director-research at Motilal Oswal Securities Ltd.

Aggregate sales growth stood at 20.3%, lower than the average of 23-25% growth seen over the last two years.

Also, with other income reducing by 49% and interest costs shooting up 55%, net profit margins saw a fall of 430 basis points (bps) from the 9.46% witnessed last year.

The worst affected companies were from sectors like oil marketing companies, telecom, metals, infrastructure and auto ancillaries.

“There is a worrying trend of zero or low order inflows, which has continued in infrastructure companies. There was a hope of improvement in order flows in this quarter, which has not taken place,” said Sonam Udasi, head of research at IDBI Capital Market Services.

The ordeal for broader index companies seems far from over. Slowdown in demand along with persistent high input and interest costs and sharp fall in Indian currency could hit profitability in the coming quarters as well.

“The larger companies would hold on to growth but the broader universe would continue to feel the pressure. Though consumer-oriented sectors such as FMCG and two wheelers are still doing alright, there has been slowdown in sales of four wheelers and traffic growth for telecom companies too have been muted,”said Rajgarhia.

The weak current earnings season has resulted in 1-2% downgrades to consensus Bloomberg Sensex earnings for fiscal 2012 and fiscal 2013 to 1161 and 1328, respectively.
Analysts see further scope for downgrades to fiscal 2013 earnings estimates even though majority of the earnings downgrades have already taken place since the beginning of 2011.

“We think that the bulk of negative earnings revisions are behind us, with MSCI India consensus forecast for next fiscal down 11%/13% since the beginning of 2011,” Parul J Saini, executive director at RBS Asia, said in a note last week.

“However there could be more risk to fiscal 2013 consensus estimates, and expect fiscal 2013 growth of only around 12%,” noted Saini. “After this earnings season, the consensus of analysts on growth for next fiscal, which was at 15%, has shrunk to 7%-10% for many brokerages. If the RBI moves quickly to signal an end to high costs, only then could there be a pause before further downgrading of estimates,” said IDBI’s Udasi.