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Are Indian Companies at the Cusp of an Earnings Recovery?
Thu, 12 May Pre-Open

For Indian companies, the past few years have been tough to say the least. The earnings per share for NIFTY 500 companies have witnessed an anemic growth whichever way one slices the data. In fact, earnings have compounded over five years at a measly rate of 4%. In effect, the earnings growth is much lesser than inflation! India is a net importer of commodities, thus the softness in the prices of commodities should result in increased bottom line. However, that is not the case, as poor sales growth and an increase in the overall debt burden has kept margins in check.

There is some hope though. The current earnings season has revealed some positive signs that the earnings recovery could be in sight. But this could be gradual.

According to an article in Livemint, there are three key factors which point to a slow and a gradual recovery.

The first signs are improved operating profit margins. Commodities and other leveraged companies aside, the softness in global commodities prices has on an overall level benefitted companies. We were correct in our analysis of this mean reversion, and subsequent increase in profit margins. This is one of the primary driver of earnings and would help India Inc. post a strong and steady growth.

The second sign is an improved operating efficiency. Consider the two indicators, one is the index for industrial production (IIP) and the gross value added (GVA). The former measures industry output volumes, while the latter measures the value addition. The growth in the value addition has occurred at a faster pace than the output volumes which suggests that corporate efficiency is improving. This would result in improved profits.

The third sign is retained earnings of the private sector. According to the numbers released by the Central Statistical Organisation (CSO) earlier this year, the gross savings of private non-financial companies have nearly doubled between 2012 to 2015. These corporate savings are nothing but retained earnings. The rise in retained earnings could mean that the corporate capex has slowed down. In fact, Indian companies had recently undergone a huge capacity expansion and are now waiting for their capacity utilization levels to improve.

These are positive signs, though the actual recovery might be slow and painful with some of the highly leveraged companies using additional cash flows to retire debt than look for growth. However, the slow improvement in earnings can be construed as signs that things finally look to turn for the better.

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