India Inc’s earnings growth for the second quarter (Q2) was actually in line with expectations, even though profits were hit by high foreign exchange losses (around 25 per cent of net profit) and rising input and interest costs. Nevertheless, the quarter was weaker than the profit and loss figures suggest, according to Citigroup analysts. Sales growth at 19 per cent represented a considerable slowdown from 28 per cent growth in the first quarter. Margins remained under pressure for the fourth quarter in a row — down to 452 basis points on a year-on-year basis from Q2.
Trends were, however, positive for sectors like auto, auto ancillaries, chemicals, cement, fast moving consumer goods, fertilisers and information technology. But a large number of sectors, including metal, realty, infrastructure, power, paper, sugar, media and entertainment and aviation, posted a dismal performance. Results for pharmaceutical, telecom and capital goods were mixed. Most banks registered robust operating profit growth, but public sector banks were hit by higher provisioning for non-performing assets.
Volatile commodity and currency movement also took their toll on India Inc’s earnings. This trend is likely to persist and will trouble companies across sectors. The impact of high inflation and interest costs, too, will be pronounced over the next two quarters. A slowing economy, fall in demand, slowdown in industrial capex, sluggish infrastructure spending and dwindling order inflows will certainly affect top-line growth.
For the last three quarters, the market has been correcting itself after every earnings season. The weak earnings trend was not unexpected, but the severity of earnings deceleration, the pessimistic outlook voiced by companies and the worsening macro scenario spooked markets over the last one and a half months, say analysts. Given the way in which both the global and local environments are deteriorating, the outlook for the market in the near term can only be considered bleak.((Click here for the graphs)