Corporate earnings to remain sluggish for 2-3 years

Corporate earnings will remain sluggish for the next two to three years and private sector investments will not pick up till the second half of 2018-19, according to an analysis by rating firm India Ratings. The inability of companies to make new investments was because of their significant leverage and capacity underutilisation, it said.

The rating firm said it expected growth in earnings before interest, tax, depreciation and amortisation (Ebitda) of BSE 500 companies to range between 12 per cent and 14 per cent in 2016-17 under a hypothetical scenario of fiscal loosening, compared to the five per cent to six per cent growth expectation in 2015-16.

"Although still an improvement over the 3.5 per cent growth witnessed in 2014-15, it is significantly below the growth numbers of 17-22 per cent achieved between 2009-10 and 2011-12 and the median growth of 17.5 per cent over 2001-2015," it said.

This analysis will come as a setback to both the corporate sector and the government, which has taken several steps to encourage investment.

A survey of 50 chief executive officers conducted by this newspaper last month revealed that corporate leaders were expecting a turnaround in earnings in 2016-17, while a majority of the respondents said they would invest more in 2016.

Rating agency India Ratings said the key driver for the fall in profits during 2014-15 and 2015-16 was weak investment by the private sector though growth in public investment stemmed a precipitous fall.

The sizeable underutilised capacity and leveraged balance sheets of corporates are the main reasons for the slowdown in investment. It said aggregate corporate profitability growth was just 3.5 per cent in 2014-15 as compared to 16.2 per cent in 2013-14. Changes in consumer purchasing preferences from brick-and-mortar stores to online shopping, China's structural slowdown, declining commodity prices, and slow agricultural growth have affected private consumption. However, this was partly offset by industrial growth due to a fall in crude oil prices, India Ratings added.