Earning downgrades to continue in FY14

Markets to remain skittish till earnings growth picks up visibly

As the earnings season comes to a close, it is becoming clear that no recovery is in sight. There's nothing to write home about the quarter's sales and profitability growth. Given that FY14 is unlikely to be any different, corporate earnings growth is not expected to revive in a sustainable way. Review reports released by equity strategists have rather dismal headlines, as the broad consensus is that the current financial year might not be different from the one gone by. Sales growth of the Sensex has hit the lowest in 14 quarters.

For starters, post-tax profits of the 30 Sensex companies have not grown in comparison with the corresponding period last year. The sales growth of these 30 companies has plummeted to a 14-quarter low of 6.8 per cent. At least 10 companies have shown a decline in earnings. Jyotivardhan Jaipuria and Anand Kumar of Bank of America Merrill Lynch expect further downgrades to FY14 Sensex earnings per share (EPS) to Rs 1,260, an eight per cent earnings growth against bottom up 14 per cent. Despite the fall in input costs, aggregate operating margins of Sensex companies grew 20 basis points only. If one excludes commodities, then operating margins were down 90 basis points, largely led by technology companies.

On earnings trends are concerned, nothing seems to have changed from the past quarters. Consumer and pharmaceutical companies like ITC, Hindustan Unilever, Dr Reddy's and Sun Pharma reported healthy numbers, while Bharti Airtel, Tata Motors, Hindalco and JSPL continued to be laggards.

The story is no different if one looks beyond the Sensex heavyweights. Espirito Santo Securities has reviewed the quarterly performance of 400 companies and the situation is no different. Revenue growth of these 400 companies has fallen to a multi-year low of 3.8 per cent compared to the corresponding period last year. According to the brokerage, March quarter earnings were a mixed bag, with 37 of the 71 companies in the BSE100 index (ex-financials) delivering ahead of market expectations but it was very sector-specific with the usual suspects disappointing.

Thanks to slowing demand, slackening industrial production and supply constraints, sectors like industrials, energy and metals are continuing to struggle. However, information technology (IT) and consumer staples have seen revenues grow in double digits. A depreciating rupee has helped shore up the bottom line of IT companies. For the last three quarters, analysts have been predicting a turnaround, however, now it is apparent that it was merely wishful thinking. With economic growth not showing any sign of trending up, and interest rates not coming off meaningfully, corporate earnings would continue to struggle. Any uptick in the market will now have to be led by earnings growth and "not on the multiple expansion of last year, given India is trading in line with long-term averages," says Anand Jhawar of Espirito Santo Securities.