Slowdown deepening and widening: Credit Suisse

Earnings growth of Nifty companies at slowest pace since crisis

India’s economic slowdown is deepening and widening, said Credit Suisse. Earnings estimates are falling, as growth in sales and operating profits of the top 50 Indian companies are at the slowest pace since the economic crisis, said the investment bank in a client note.

Earnings per share (EPS) estimates could decline 8-10 per cent in 2013-14 after settling down at seven-eight per cent by March 31, 2013, said Credit Suisse’s Neelkanth Mishra and Ravi Shankar.

Sales and operating profit growth of companies on the 50-share Nifty have slowed by 10 per cent and five per cent, respectively, as wages and interest costs further weighed on margins.

“After what we think was a head-fake in January, when consensus FY14 EPS ticked upwards, estimates are coming down again,” said Credit Suisse analysts in its third quarter earnings review report. “Sales growth for Nifty companies slowed to 10 per cent, a new post-crisis low, as inflation has started to drop, finally affected by the growth slowdown,” they said.

Other analysts, such as Kotak Institutional Equities’ co-head Sanjeev Prasad, said a combination of the government’s fiscal tightening and a tight monetary policy by the Reserve Bank of India are resulting in the economic slowdown.

Credit Suisse said the slowing operating profit was partly because of a growth decline in total staff costs. However, interest costs rose 40 per cent in the December quarter from the same period a year ago.

“This (rise in interest costs) is likely as projects are now starting to get commissioned, and capitalised interest is now appearing on the P&L. Worryingly, interest coverage continues to get worse,” said Credit Suisse’s analysts.

The investment bank said earnings of oil and gas, banks and information technology services companies during the quarter were better-than-estimated.

“The market was very discerning this quarter: companies that beat estimates did exceptionally well after results, and companies reporting in-line or weak results were beaten down,” said the analysts.

Earnings during the quarter showed construction activity, steel and cement demand and order books have slowed during the quarter, said Credit Suisse. “While the slowdown in investment activity has been prolonged and well-flagged, commentary from companies did not suggest any bottoming out or inflection,” said the analysts.

Revenues of state-owned power equipment maker BHEL declined during the quarter from a year ago, for the first time in a decade, while construction-to-engineering conglomerate Larsen & Toubro relied on West Asian markets and real estate deals to drive its order book, Credit Suisse said.