Fresh cracks in earnings growth ahead

The Street expects corporate earnings growth during third quarter to deteriorate further, buffeted by a sharp fall in the rupee and macro-economic headwinds.

“On a broader level, almost every factor seems to be suggesting a decline in earnings as we have seen a slowdown in revenue growth even as input and debt costs remain elevated. Also, there would be significant mark-to-market losses on the foreign exchange front,” said Rajat Rajgarhia, director, research, at Motilal Oswal Securities.

D D Sharma, vice president of retail research at Anand Rathi Financial Services, concurs.

“This is likely to be an uncertain quarter for companies with huge mark-to-market losses for those with currency exposure,” he said.
Companies highly dependent on imported raw materials or having high exposure to dollar-denominated loans would bear the brunt, even as export-oriented ones such as IT and pharmaceuticals ride on forex gains.

The rupee. which had fallen 8% in second quarter against the dollar, slipped 7% anew from 49.92 on October 3 to 53.31 on December 23.

For the larger index companies, the trend in earnings growth is likely to be similar to the second quarter since they are better placed than broader universe.

The last quarter saw BSE 500 companies (excluding banking and financials) reporting an over 30% drop in earnings even as Sensex companies (excluding banks and Coal India) reported a 5% growth.

“Sales growth is expected to be at around 20% for the quarter. Information technology and real estate companies are likely to report some slowdown in sales. Net profit margins are expected to grow by 7-9%, led by sectors including private sector banks, fast moving consumer goods and autos,” said Chokkalingam G, executive director and chief investment officer at FCH Centrum Wealth Managers.

Vaibhav Agrawal, vice president-research at Angel Broking, also sees earnings growth to be more or less on similar lines as last quarter.

“Almost all the factors that affected earnings last quarter continue to be present. Though topline may come in at close to 17-18% aided by higher realisations due to inflation, it makes sense to focus on bottom line numbers which may come in at closer to 10%,” he said.

Operating margins are likely to be around same levels as in the second quarter.

“Operating profit margins are expected to be similar to September even though raw material costs have fallen, but the benefit has been taken away by the rupee movement,” said Chokkalingam.
Experts believe the important factor to watch out for this quarter would be trend in sales growth for consumer-oriented sector as there are signs of weakness emerging.

“Our recent field trips and channel checks confirm signs of a consumer slowdown spreading. We temper our enthusiasm on consumer discretionary. We do see downside risks to some expensive staples names owing to the triple impact of a small slowdown in demand growth, margin pressure due to the INR depreciation and high valuations,” wrote Mahesh Nandurkar and Bhavesh Pravin Shah, analysts at CLSA Asia Pacific Markets, in a note on December 22.

So, will all this mean another flurry of downgrades to this year’s earnings? Experts don’t think so, but said the risks to next fiscal’s earnings remain.

“The consensus earnings estimates have been coming down and we expect more hits to next fiscal projections in coming quarters if the macro factors continue to stay weak,” said Rajgarhia.
The consensus earning per share for Sensex this fiscal is around `1,161, down over 9% since the beginning of year, while it’s at `1,323 for the next fiscal.