Slowing corporate earnings growth offers wake-up call for market rally

Corporate earnings are growing at the weakest pace in nearly six years, in a more sober reflection of the economy than a domestic stock market hovering near record highs since the May election of pro-business Prime Minister Narendra Modi.

The new PM, previously known for economy-stimulating infrastructure projects on a state level, has been widely touted as the man to revive an economy lumbering through the longest spell of sub-5 per cent growth in a quarter of a century.

Such is investor sentiment surrounding Modi's governence that the National Stock Exchange (NSE) index Nifty has risen by a third in 2014, touching a lifetime high on Wednesday.

But weakening corporate earnings growth highlight the domestic economy's continued need for increased investment, lower interest rates and a slower rate of inflation, company executives said.

"We did assume at the beginning of the year that domestic conditions would improve post elections," said R Shankar Raman, chief financial officer of conglomerate Larsen & Toubro (L&T).

"It has, sentiment has improved, but the ground reality is still to change. I do think it will take a good six months for it (to) completely kick in. Hence, I want to be circumspect."

The median net profit growth of 102 domestic companies, which have reported July-September earnings, was 7.7 per cent, the lowest since October-December 2008, according to Thomson Reuters StarMine data on companies tracked by at least one brokerage.

Median revenue growth at those companies - including cement maker ACC, financial services provider IDFC and mobile phone network operator Bharti Airtel - was 10.5 per cent, the lowest in nearly five years.

Revenue growth is likely to slow even more in October-December to 10 per cent, but will pick up to 12.5 per cent in January-March in line with a general expectation for quicker economic growth and a reduction in interest rates by the Reserve Bank of India (RBI).

Even so, Maruti Suzuki India, the country's largest carmaker, in October said its auto sales growth would slow in the second half of the current financial year ending March 31, 2015, cooling hope of an industry rebound after two years of declining sales.

"The situation of course is not as bright as many people hoped it would be at this point. We do not expect the growth in sales of Maruti will be as high a per centage (as) in the first half and this will slow down," said MSI chairman, RC Bhargava.

The downbeat outlook puts pressure on the prime minister to deliver on election promises to take "decisive action" to facilitate investment in power generation, roads and rail, to stimulate economic growth.

"We need some fundamental changes on the ground," said the CFO of a large domestic conglomerate who spoke on conditions of anonymity when expressing views on the government. "Up to now, there are many statements of intent, but there is no real investment," the CEO added.

(Additional reporting by Aman Shah) - Reuters