Earnings in Q2FY09: Fall season

Not in a long time has the mood in the market been as downbeat as it is on the eve of the September quarter earnings season. A wave of selling has swept through markets across the world and India has been no exception; at 11,328, the Sensex has now lost around 44 per cent since the start of the year and 24 per cent in the last month alone as foreign investors rushed to salvage what little they could.

Convinced that stocks are now definitely not overpriced, domestic mutual funds and insurance firms have started hunting for bargains. But perhaps the fire sale hasn’t begun yet; even if earnings are slightly below expectations the markets could tumble further.
 

INDIA INC’s PROFITS LOSING STEAM
	Growth (y-o-y) in %

Q2-08Q3-08Q4-08Q1-09 Sales11.2115.9325.7136.03 Operating profit21.4217.1012.7113.61 OPM(%)19.8818.4016.8315.85 Net profit23.4514.158.415.94 Source: BSRB                       Sample : 2418 cos (excl financials)

The June quarter numbers came in slightly better that what the Street had been betting on—perhaps the estimates themselves were conservative. Analysts are not too optimistic about the September quarter either.

For a universe of 130 stocks, Kotak Securities expects earnings to fall by 12 per cent led by losses of oil marketing companies, lower profits for automobile makers given that volumes have been low and margins could get compressed and a fall in profits for cement, metals and utilities. However, better numbers from ONGC are expected to prop up earnings for the Sensex estimated to grow by just under 12 per cent.

Tech firms will be helped by the weaker rupee but may lose out because of the dollar’s appreciation versus the euro. The Street will understandably be looking ahead to see what kind of volume growth and pricing trends companies talk about given the difficult environment overseas, especially for those with an exposure to the banking and financial services space.

SSKI believes that while capital goods makers will report higher revenues of between 24-29 per cent, given that their order books have been full, operating margins could be under pressure because of higher prices of steel. All in all, with the global financial crisis worsening and key economies slipping into a recession, the Indian economy too will not go unscathed; the tight liquidity conditions are already beginning to choke production and consumption.

So, while the numbers will tell us how companies having been coping in a difficult environment, what we need to hear about from managements is their reading of the demand and supply trends over the next 6-12 months.