Prepare to live with market uncertainty for another year

 

A cursory glance at the quarterly results announced so far could lead one to assume that happy days are back again for Corporate India. It’s true that barring Infosys, most companies have posted double digit earnings growth. However, it is pertinent to note that most of the declared results have come from the comparatively sanguine sectors of private banking and information technology (IT).

As the results season unfolds, we are likely to see several companies post poor numbers across sectors, including metals, capital goods, infra, PSU banks, telecom and cement. This impending reality check will take away much of the optimism triggered by an apparently decent beginning.

Our calculations suggest we are staring at a flattish growth, ex-PSU oil majors, for the Nifty and Sensex. In actuality, this would be one of the worst quarterly performances since the global financial crisis in 2009. Even for FY13 as a whole, profit after tax (PAT) growth would work out to a meagre six to

seven per cent; one of the weakest since FY07. Worse, revenue growth has been noticeably slipping in FY13, from about 15 per cent in Q1 to the estimated seven to eight per cent in Q4. And looming large is the resumption of the earnings downgrade cycle, one that had slowed down in the last few months. Under these circumstances, anyone projecting a 15 per cent plus earnings growth for FY14 might be forced to make a downside revision.

The triggers of the impending slowdown are not hard to fathom. For one, domestic demand has considerably slowed down, inflation is sticky, global revival is visibly slow and investment cycle continues to be below potential. The hopes raised in late 2012 about a forthcoming reform spree have by now crumbled.

And given the state elections in November-December and general elections next year, there’s hardly any scope for major decision-making. The business sentiment is subdued and any signs of recovery seem remote at best. It’s hardly surprising that corporates are not committing any big investments as yet.

Our analysis over the past two decades reveals that real gross domestic product (GDP) and global commodity prices are two key drivers of corporate profitability growth. Given the perceptibly weak near-term outlook for real GDP growth as well as global commodity prices, we foresee a subdued corporate profit growth for the better part of FY14. Our calculations point to a 10-11 per cent growth in Nifty earnings per share, which we believe is achievable. Going with the five to six per cent real GDP growth in FY14, we don’t see earnings clocking a higher rate. At the same time, it won’t fall to single digit either, thanks to the support emanating from the low base earnings effect of FY12 and FY13, relief on the input cost front and the depreciated level of INR proving accretive to earnings.

Slackening of sales and high leverage are clearly proving to be among the major impediments to earnings. Although interest costs have peaked, the demand scenario is likely to remain subdued in FY14. It’s amply clear that the slowdown won’t be limited to a couple of industry sectors; instead it would be broad-based in nature. What does that mean in stock market terms? As far as index values are concerned, scope of price-earnings expansion is ruled out, especially with portfolio flows moderating. The writing on the wall is clear - we will have to live with market uncertainty for another year.

The author is head of research, India Infoline