The last two quarters were a big disappointment as far as the earnings performance of India Inc was concerned. High interest rates, rising commodity prices and weaker rupee impacted the profitability of most companies. And now with 3QFY12 (third quarter of the financial year 2011-2012) results being on the anvil all eyes are glued to the earnings performance for the current quarter.
As per news reports, the NSE-Nifty companies are expected to report a robust growth in revenues (25% YoY) with profits also expected to rise on a year on year (YoY) basis. While this may indicate a turnaround in the overall scheme of things we feel it is too early to jump on the bandwagon here. This is because none of the macro-economic indicators have shown any meaningful signs of improvement till now.
With the government expenditure rising and tax revenues falling (due to a slowdown) fiscal deficit is expected to breach the original target of 4.6% of Gross Domestic Product (GDP). This may increase government borrowing and crowd out private investments in an environment where the overall business confidence is already low. Even the performance on export front has been disappointing over the last two months due to slowdown in the western world. Weaker rupee is making the matters even worse as rising import cost amidst significant rupee depreciation stretches the current account deficit.
While there are indications that monetary tightening may come to an end with food inflation easing in the recent weeks it may be noted that it is not just high cost/scarcity of capital that has derailed growth. Policy inertia is also equally responsible for retarding growth. And we are seeing no signs of that getting resolved anytime soon.
Now, let us see how the worst impacted sectors (capital goods, metals and realty) in the last year are expected to fare in the coming quarter.
Capital Goods: - Both top line and bottom line will remain under pressure due to execution issues and rising input costs, respectively. While some companies had surprised us positively on the revenue side in the last quarter it would interesting to see whether they are able to continue with their outperformance. Slowdown in the power sector due to coal shortages and environmental issues will continue to impact the order pipeline of power equipment manufacturers.
Metals: - Rising input costs are expected to keep margins under pressure. The mining ban in Karnataka will impact the overall volumes of companies dependent on sourcing iron-ore from there. Further, companies with high exposure to foreign borrowings are likely to witness huge mark to market losses.
Real Estate: - High interest rates and rising prices will impact affordability and subsequently the demand. Majority of the real estate companies have huge debt outstanding which is ripe for repayment. Hence, liquidity will continue to remain tight for the developers. However, companies having presence in tier 2-3 cities are expected to perform better than their larger counterparts.
Thus, we believe that unless the interest rate environment turns conducive and government comes to a meaningful conclusion from policy perspective, performance of India Inc will continue to remain lukewarm in the near future.