Corporate Earnings To Fall This Year: James Capel

James Capel B&K, a part of the global investment powerhouse HSBC group, predicts a pick-up of earnings growth to 23 per cent in the next financial year, by when it expects earnings of Indian corporates to bounce back.

The report has attributed minimum alternate tax (MAT), softening of petrochemical and metal international prices, coupled with a reduction in the import duties in the recent budget, as reasons for the slow-down.

It said sectors such as petrochemicals, chemicals, paper and steel, which have a 13 per cent weightage in our universe will show negative earnings growth this year.

It is only because of sectors, such as, automobiles, consumer goods and banks that the average earnings growth is still in double digits, it reported.

 

The depressed prices of international commodities like petrochemicals, aluminium, steel and paper, along with a steady decrease in import duties of these product,s will have an impact on the earnings growth of many of the stocks. On the other hand, a steep increase in the controlled prices of petroproducts and the subsequent increase in freight rates will result in an all-round reduction of margins, it said.

Significantly, MAT has been cited as one of the three reasons for the poor earnings growth this year. The introduction of MAT will bring most of the companies into the tax net. The most severely hit companies are the ones which had major expansion plans coming up.

The prediction of a 23 per cent earnings growth for 1997-98 stems from the fact that most of the factors affecting earnings in 1996-97 will have a one-time effect on the margins. Unless there are more changes, the earnings growth will bounce back as volumes jump, it said.

The report cautions on earnings rebound. Any changes in expansion plans due to liquidity crunch will tend to depress earnings. This is a major risk to 1997-98 earnings. Also, the global trends of commodity prices will continue to affect overall earnings growth. Our global house view is that most of these commodities should bounce back, which will have an overall positive impact on earnings, states the report.

The two major constraints to high growth in India, identified by James Capel B&K, are infrastructure and lack of smooth fund flow to the corporate sector.

Eliminating the first bottleneck requires large investments which can only happen over a period of time. The second bottleneck is structural and will only be removed as the economy opens up and the financial sector reforms continue.

The report observes that during the transition period, continuous acceleration of growth along with reasonable inflation is not feasible.

Given the recent hints from the RBI, it seems likely that it will frame a tight busy season policy credit policy. However, the effectiveness of the policy would depend on the fiscal balance.