Tide is turning for corporate earnings: Morgan Stanley

Corporate earnings have failed to meet expectations quarter after quarter. And the latest one (September quarter) is no different. However, foreign brokerage Morgan Stanley believes the trend could reverse this quarter onwards.

“Some market participants may be anchored to the decade gone by, remaining skeptical about the earnings growth recovery. We believe the cycle is turning as corporate India has come out of the balance sheet and earnings recession. We expect an earning CAGR (compounded annual growth rate) at 20 per cent in the next two years,” said analysts Sheela Rathi and Ridham Desai.

For the June-September quarter, the combined net profit of a broader sample of 1,852 companies was down 2.6 per cent year-on-year (y-o-y), better than a 10.3 per cent y-o-y decline in the first quarter, an analysis by Business Standard shows. In the September 2016 quarter, however, profit grew at 5.6 per cent. The combined net sales for the entire universe were up 8.7 per cent against an 8.3 per cent growth in the June 2017 quarter and a 4.2 per cent growth a year ago.

Morgan Stanley says the revenue growth for energy companies was healthy in the September quarter, while telecom companies disappointed on most financial metrics.

"Materials, private energy and oil PSUs (public sector undertakings) have reported the fastest growth in revenues. Materials and industrials reported the fastest y-o-y pick-up in profits. Overall, the telecom sector was the biggest laggard on revenues, margins and profit growth,” says Morgan Stanley.

The note added, “For the past seven years, earnings revision breadth has been negative, earnings breadth surprise has been a mixed bag and the skew in individual company earnings has taken a toll on headline growth numbers.”

The brokerage said the drivers for sustained growth recovery were now in place.