Low Expectations

The fall in the margin would be on the back of higher commodity costs,slower volume growth and limited pricing flexibility of companies. In fact,the likely tepid performance is in line with the overall economy as the GDP growth is likely to moderate at 6.9% for the current financial year from 8.4% last fiscal and the consumption growth has come down from 8.1% in 2010-11 to 6.4% in 2011-12.

Analysts say the deceleration in growth is primarily due to a slowdown in investments because of the policy paralysis at the Centre and higher interest rates. Crisil estimates that pressure on revenue growth and Ebitda margins will be felt more on companies in consumption-linked sectors like organised retail and textiles,and interest rate-sensitive sectors like automobiles and real estate. As a result of a muted revenue growth and Ebitda margins,net profits of Indian companies will be crimped.

Similarly,Edelweiss Securities estimates that the quarter ended March will be a weak one with a 6.4% year-on-year profit-after-tax growth for Sensex companies. Revenues for Sensex companies are expected to grow at 16.4% year-on-year and Ebitda margins would decline by 238 basis points. However,the report says the earnings trajectory seems to be bottoming out as reflected in the rising upgrade-to-downgrade ratio. Even high-frequency macro indicators suggest that the economy is emerging from a phase of extreme weakness. Angel Broking,too,expects Sensex companies’ Q4FY12 earnings to remain subdued and grow at a meagre 5.8% year-on-year. The cooling of inflation and interest rates are expected to underpin healthier growth over FY12-14 and the Mumbai-based brokerage house expects Sensex companies to deliver an earnings per share growth of 13.4% year-on-year in FY13 and 14.3% in FY14,which means a 13.9% compound annual growth rate over FY12-14.

Prabhudas Lilladher estimates that revenue growth of Nifty companies is expected to fall to an eight-quarter low of just 14.8% year-on-year — the previous time it had fallen lower than this was in Q3FY10 at 10.1%. And revenue growth,excluding oil and gas companies,is expected to rise at 16.2%,again a seven-quarter low. Similarly,profit after tax is expected to bounce back strongly by 20.4% and,excluding the oil and gas sector,it will be 13.4%.

The brokerage house says the expansion in net margins is a clear break from the trend seen since Q3FY11,when growth in profit after tax had been lagging behind revenue growth.

Moderation in input price inflation and near-absence of foreign exchange losses would push up net profits of companies. In fact,in Q2FY12 and Q3FY12,there was a sharp depreciation of in the rupee,leading to huge foreign exchange losses for many companies. However,corporate India continues to encounter headwinds in the form of slowing demand due to uncertainty in the macro environment and high interest rates.

Sector-wise,cement and information technology companies would outperform. Cement demand,after growing at a healthy pace of 10.4% on an annual basis in Q3FY12,continued its momentum and grew by 10.5% year-on-year in January-February 2012. Angel Broking expects its universe of cement companies to report an 18.4% year-on-year growth in its top line on account of a 6.1% growth in dispatches and a substantial improvement in realisation. However,the dampener would be cost pressures that companies are facing due to higher coal and freight cost,which is expected to result in declining margins for some players.

For software companies,the quarter ended March is typically a soft quarter as budgets get closed from January to March and decisions are taken between February and March on the kind of discretionary,operational and capital spending. Analysts at Crisil note that the depreciation of the rupee and the increase in offshore volume would bode well for IT service providers as their revenue would grow and Ebitda margins will improve by 100-150 basis points.

For the real estate sector,the slowdown in new sales continued because of the overall slowdown in the economy,inflationary pressure,higher interest rates and expectations of price correction led most buyers to defer buying decisions. Moreover,with various issues with land acquisitions in the national capital region and other parts of the country,the slowdown in sales is likely to continue. For banking,the slowdown in credit growth will dampen the total income growth as net interest income is likely to grow only by 17% in Q4FY12 compared with 25% in the same quarter last year.

Analysts expect the fast-moving consumer goods (FMCG) sector to post a strong Q4FY12 despite the economic slowdown. Margins are likely to remain stable sequentially as companies had initiated a few rounds of price hikes. Edelweiss Securities expects FMCG companies to report a profit after tax growth of 16.6% on an annual basis on the back of 16.3% year-on-year revenue growth. Emkay Securities expects revenue of FMCG companies to grow by 22% on the back of price increases by the companies.

Analysts say the results for the quarter ended March and the monsoon forecast would be crucial for the markets to get direction. Some of the domestic macro fundamentals like cyclical uptick in industrial activity are turning positive. Analysts also say the overall earnings trajectory for FY13 is showing improvement with overall revisions balance turning in favour of upgrades and will support earnings growth in the coming quarters.