Another lacklustre earnings season on the cards

India's macro-economic environment is in bad shape. Both growth and consumption are slowing. The earnings' season is round the corner. Still, market analysts expect corporate profitability to grow around 10 per cent, thanks to lower commodity prices which have been further helped by a weak rupee, allowing margins to expand.
 
India Infoline, in a research note dated July 6, estimates profit growth for the 150-odd companies it tracks to be a modest 10 per cent for the quarter ended June 2012, down from 16 per cent in the quarter ended last March. Revenue growth for the same set of companies is expected to be 15 per cent - the lowest in two years. "This is perhaps to be the sixth consecutive quarter when profit growth will lag revenue growth on an aggregate basis," the report highlights.
 
However, India Infoline analysts do not call the breadth of earnings growth poor because they expect more than half the sectors to report double-digit profit growth. Sectorally, information technology (IT) and financials are likely to report 33 per cent and 24 per cent growth respectively. For IT, the average 8 per cent weakening of the rupee on a quarter on quarter basis will boost profit growth. For financial services, however, excluding SBI, profit growth will decline from 24 per cent to 13 per cent. Profit growth of private sector banks is likely to decelerate.
 
Kotak Securities, on the other hand, is optimistic as it expects a revenue growth of 17.8 per cent in the stocks under its coverage, barring banks and non-banking finance companies (NBFCs). Among sectors, Kotak Securities expects capital goods, IT and logistics to propel this growth. While sharp rupee depreciation will boost revenues of IT companies, higher execution levels should drive revenues of capital goods companies. For banks and NBFCs, net interest income is expected to register a growth of 19.2 per cent in the light of an annual 17.8 per cent loan growth and 14.4 per cent deposit growth as on June 15 respectively. A margin compression of 5 to 10 basis points, on a quarter on quarter basis, is factored in by Kotak Securities, owing to deposit repricing. Also, the full impact of tight liquidity environment which led to spike in wholesale deposit rates towards the end of March 2012 would reflect in the latest quarter.
 
However, Kotak Securities expects operating margins for the sectors under its coverage to be lower on an annual basis. "Except for IT and Power, other sectors will likely report lower margins," the brokerage said in its note dated July 9. "The pressure on margins is due to relatively lower revenue growth, higher raw material prices (largely because of rupee depreciation) and higher fuel costs, which companies have not been able to pass on fully."
 
But there are complete optimists out there too. Motilal Oswal Securities, in its research note, believes that we are at the bottom of the earnings downgrade cycle for the Sensex. The brokerage's key supporting arguments include: 1. Pace of earnings downgrade has slowed down considerably, 2. Profit after Tax (PAT) composition is shifting in favor of seculars, 3. Further easing of commodity prices is positive for aggregate PAT, 4. Currency offers some more earnings cushion and, 5. Major bottom-up contributors to incremental Earnings per share (EPS) are unlikely to disappoint. SBI, ICICI Bank, HDFC Bank, Infosys and TCS which are the highest contributors to Sensex EPS growth - accounting for 80 per cent of earnings growth - are unlikely to deliver disappointing number, opines Motilal Oswal Securities.
 
Expectations from the results are not very high, according to Kotak Securities, which may act as a cushion for the markets. Earlier in end-June, CRISIL Research had forecast that Indian corporate houses revenue growth, in the quarter-ended June 2012, to be the weakest in the last six quarters with 15 out of 26 sectors likely to face margin pressure. Clearly, double-digit growth in revenue is unlikely to cheer investing sentiments.