Waning hopes: Earnings drought in India is just getting extended

Aprajita Sharma  New Delhi     Last Updated: January 15, 2016  | 16:06 IST
Waning hopes: Earnings drought in India is just getting extended
Brokerage firm Ambit Capital in its December report had predicted earnings growth will remain weak in fiscal year 2016 and fiscal year 2017. Photo: Reuters

Third quarter earnings season is now running in full swings, with results of bluechips such as TCS, Infosys and banks such as IndusInd Bank already out.

Expectations from the quarter are already low, given the prevailing concerns globally and their impact on the domestic economy. Metldown in energy prices, delays in reforms and, thus, capex cycle, and weak demand in rural India, are all weighing in on the prospects of a rapid economic revival.

But if analysts were to believe, the wait for revival may just get extended and the two-three quarters, the time investors are expecting earnings to take to revive, could easily turn to two years. Analyst though expect falling energy prices may keep lifting overall profit margins going ahead.

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India Ratings and Research believes that corporates will take at least two more years to report accelerated earnings and reach the peak level achieved in 2011-12.
In a recent report brokerage firm Ambit Capital in a recent report had predicted earnings growth to remain weak during FY2016 and FY2017.

"Earnings per share (EPS) growth in FY16 and is FY17 likely to remain in single digits (just as in the post 1991 world), we expect the Sensex to generate single digit returns in FY16 and FY17," said brokerage.

Ambit Capital pointed out India has witnessed healthy GDP growth averaging 10 per cent in nominal terms over the last six quarters, but this has not resulted into higher earnings per share (EPS) growth for the Nifty companies.

The reason has to do with three profound structural changes taking place in India: The 'Modi, Rajan and Technology' resets.
"The correlation breakdown between GDP growth and corporate revenues and earnings for the Nifty 50 companies, in our view, is a reflection that a significant portion of the economic growth pick-up is no longer being exploited by listed large cap companies. This, in turn, is because India is being fundamentally changed by an inter-play of the three dominant forces at work in the country today: Modi, Rajan and Technology," said Ambit Capital in a research report.

Ambit Capital report said that Prime Minister Narendra Modi is calling time on the traditional model of subsidy funded consumption growth and crony capitalism driven capex growth in India. So, the incumbents that have thus far enjoyed high earnings growth on the back of corruption and artificial suppression of competition will face increasing pressure on their revenues and earnings.

On the other hand, The RBI Governor Raghuram Rajan is increasing competition for traditional private banks through the introduction of new banks, deepening of corporate bond markets, the resurrection of PSU banks and reducing regulatory arbitrage between banks and NBFCs, the report cited.

Technology is the third factor playing spoilsport for some sectors such as IT and retail, said the report, adding, "New innovations are weakening the traditional offering of Indian IT services firms while increasing competition for retail lenders and B2C companies," said brokerage.

Meanwhile, India rating expects ebitda growth of BSE 500 corporate to range between 12-14 per cent for FY17, under a hypothetical scenario of fiscal loosening, compared to the 5-6 per cent growth expected for FY16.

Rating agency believes investment and commodity prices linked sectors will post muted EBITDA growth in FY17. Growth in sectors such as metals and mining (including volumes) and upstream oil & gas sectors would remain muted despite the base effect.

"However, the downstream oil & gas (refining) sector is likely to exhibit positive growth driven by the higher volume offtake of petroleum products and sustained refining margins. The top five sectors including auto and automotive suppliers, power (generation, transmission and distribution) and telecom contribute 55-60 per cent to the overall EBITDA of BSE 500 corporates, and any meaningful recovery in overall corporate profits would have to be driven by these sectors," said Ind-Ra.

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