Headwinds nagging, Q4 data seen insipid

Fourth-quarter earnings of companies, which will trickle in from the second week, are unlikely to warm the cockles as many of the macro and micro gusts continue to exist.

Revenue growth is likely to moderate further, which, in turn, is expected to keep earnings growth under pressure.

Prasad Koparkar, head of customised & industry research at Crisil Research, believes sales growth, which has been consistently falling for 6-7 quarters, is likely to come in at 15% in the March quarter.

“There has been a deceleration in sales growth across the sectors, be it rate sensitives, industrials, consumer or globally aligned sectors. With high interest rate and inflation, the consumer sentiment has been weak, while investment cycle has also not revived. Globally too, the environment remains challenging,” Koparkar said.

Experts see operating margins shrinking  anew.

“Companies have not been able to raise equity capital and debt capital would not be the best decision because one would not want to be overleveraged right now till interest rates start dropping off,” said Nikhil Vora, managing director and co-head of research at IDFC Securities. For the just past fiscal, Vora is looking at around 10% earnings growth, and he expects the new fiscal to deliver the same.

“So in short, the 15-16% of earnings growth that we have seen historically, we think that will correct to around 10%,” he said. “There will be further shrinkage in margins.”

A historical analysis of previous 10 quarters for BSE 200 companies (excluding banks and oil & gas) suggests a declining trend in net profit margins from 12.3% levels in the fourth quarter of fiscal 2010 to 9.3% last quarter.

Crisil Research, which has come out with a results preview for March quarter based on analysis of 227 companies across 26 sectors excluding banks and oil and gas, anticipates a 200-250 basis points fall in operating profit or Ebidta (earnings before interest tax depreciation and amortisation) margins.

The decline would be due to slower volume growth, high input costs and limited flexibility on the part of manufacturers to pass on increased costs. “However, with the fourth quarter being seasonally better, we may see improvement in margins on a sequential basis,” said Prasad.

Some analysts believe that there could be negative surprises to earnings growth in the coming quarter.

“In contrast to previous quarters, the fourth quarter is likely to show a sharp deceleration in sales growth. While there are clear signs of eroding pricing power, upside risks to cost could imply downside surprise to earnings growth,” wrote Dhananjay Sinha, co-head, institutional research, at Emkay Global.

Among the sectors, IT, automobiles, cement and pharmaceuticals are likely to report decent growth in earnings, while sectors such as construction, real estate and metals are likely to report negative earnings growth.

Going ahead, experts don’t see a huge upside in earnings growth for the next fiscal, thus keeping markets cautious.

“As a thumb rule, nominal GDP has a good correlation with top line growth for corporate sector. So given the slowdown in nominal GDP growth from 16-17% levels we saw in previous years to around 15% levels, the revenue growth is likely to be lower. Currently, we are at the lower end of sales growth and it is not likely to be worse. However at the same time, the operating margins may not see huge improvement soon,” said Koparkar.
Rajat Rajgarhia, director - research at Motilal Oswal Securities believes that markets are unlikely to break out of range as long as the headwinds persist.

“High oil prices remain a key headwind as it may lead to inflationary pressures and will make it difficult for RBI to cut interest rates. Also resumption of growth is important as the current street estimates for GDP growth at 6.5-7% and expected corporate earnings growth at 10-12%, are not very exciting for markets. Unless these factors give confidence, any big upside in markets would be restricted,” Rajgarhia said.