Corp scorecard: July-Sept PAT growth may hit 7-year low

Analysts have begun pouring over data on what the corporate performance trends for the second quarter of FY13 could turn out to be, and so far the news isn’t good. By most accounts, the July-September quarter report card is going to be a depressing one with a host of factors having weighed on corporate performance.

Latest estimates put out by brokerage firm Motilal Oswal says the second quarter is likely to be a muted one in terms of corporate performance, with a profit-after-tax growth of just 9 percent for its universe of 136 companies. In fact, the PAT growth for the 30 companies comprising the BSE Sensex is estimated to be even lower, at just 2 percent, for the quarter. Technology, healthcare, consumer goods and financials are expected to dominate the results for the quarter, with global commodities, mainly oil and gas and metals, pulling down overall performance, the brokerage says.

[caption id=“attachment_484331” align=“alignleft” width=“380”] Latest estimates put out by brokerage firm Motilal Oswal says the second quarter is likely to be a muted one in terms of corporate performance, with a profit-after-tax growth of just 9 percent for its universe of 136 companies.[/caption]

An analysis in Mint newspaper of 8 October also reckons that the markets have run up faster than the macro, and earnings will take time to catch up with the 5 percent rise in stock prices. The analysis quotes Edelweiss Securities and Angel Broking forecasting lower revenue growth for the firms they cover, at 14.6 percent and 13.3 percent, respectively.

The falling rupee, high commodity prices and high interest rate regime are expected to have taken their toll on corporate performance in the September quarter, and it is only now that both sentiment and the macro conditions are seen improving, albeit slightly. The Reserve Bank of India (RBI) has cut the cash reserve ratio and put more money in the hands of the banks for productive lending by banks and the government has unleashed a wave of reform measures.

The Motilal Oswal report points out that the month of September saw a U-turn on the policy front with the government moving from policy paralysis to ‘raging reforms’ and has now asked the question whether the UPA government at the Centre is finally ‘fired up’. Things did remain stuck in July-August, but the recent policy announcements have changed the perspective for most analysts.

“With a precipitous fall in the Indian rupee coupled with a rating downgrade staring India, the government finally bit the proverbial bullet with a change in finance minister and a series of policy measures, even at the cost of severing ties with the largest ally, TMC. This, in turn, has catalyzed a slew of measures in the last few weeks that have led to an improvement in sentiment: (1) fuel price hike / reforms, (2) opening/relaxing FDI in multi-brand retail, aviation, broadcasting, (3) Cabinet approval to raise FDI in insurance and pension, (4) easing of fund-raising abroad, (4) proposed GAAR deferral, etc. It also appeared to wade through the political fallout of these measures,” the brokerage points out.

Most analysts, including Motilal Oswal, say while these reforms will take time to finally show up in corporate earnings and general economic performance, the policy paralysis perception is now a thing of the past. There is now a positivity in sentiment which can work to the economy’s advantage. To some extent, this is visible in the 7 percent rupee appreciation, the revival of foreign fund flows (FIIs inflows at $16 billion in calendar year 2012 and improved market sentiment (the Sensex rose 8 percent in 3QCY12, making India among the best performing markets in the world), the report says.

According to the brokerage house, three important drivers for the markets, going forward, are:

(1) The fiscal situation - the firm estimates FY13 deficit at 5.4 percent, down from 5.9%

(2) Domestic flows into equity markets - base-case $30 billion inflows over FY14-17,

(3) Shift towards a more accommodative monetary stance - A need for RBI to cut interest rates / CRR in the fourth quarter of calendar 2012.

Importantly, the firm believes that FY14 could be the beginning of a new earnings cycle. Its estimate for the companies it tracks suggests FY14 EBITDA growth of 15 percent and PAT growth of 14 percent. This growth, it says, could be driven mainly by a bounce-back in sectors which were affected in FY13 (auto, telecom); and a steady growth in seculars (consumer, healthcare, financials) offsetting low growth in specific sectors like oil & gas, technology and capital goods.