 "Image via Shutterstock")
With almost all companies reporting their December 2015 quarter numbers, broking firm analysts put their heads together to figure out what lies ahead. There was nothing much in the December quarter numbers to talk about.
Kotak Institutional Equities has in fact cut earnings estimates for the current fiscal year by more than 22 per cent since April 2015. At the beginning of the year, it expected Nifty earnings to grow by around 18-20 per cent in fiscal 2016; now with one quarter to go, it expects earnings to decline by three per cent.
In a sector-wise analysis the broking firm pointed out better numbers were visible only in aviation, oil and retail. Going forward infrastructure might start contributing as the road ahead clears up for construction companies. The sharp fall in earnings estimate shows the worsening domestic and global economies as the year progressed. The note pointed out that on account of a fall in share prices, disconnect between earnings and valuations has come down significantly.
But the key question is where we stand now. Is the fall in earnings going to continue or are numbers likely to improve from here.
Kotak says that it does look like earnings growth will soon begin to pick up. The December quarter results season show that, thanks to low commodity prices, some industries have reported higher margins. Besides, the low base effect will kick in from the March quarter onwards, thanks to which earnings growth will begin to look healthy. On account of the low base, expected lower tax rate and consumption boost of 7th Pay Commission, Kotak feels that earnings for FY17 will grow by 21 per cent.
Motital Oswal in its December quarter analysis of 104 companies pointed out that demand slowdown is nearing its end but revival in corporate profitability will take more time. In its interaction with corporates the broking firm says that corporate India feels that demand slowdown is bottoming out. A revival is on the horizon – soon for some sectors, later for others.
Peculiarity of December quarter was that most companies posted better numbers at the operating level on account of lower commodity prices, though there was not much growth at the revenue level. But Motilal Oswal says that corporate chiefs do not expect much downside in commodity prices. Thus revenue growth will have to drive profit growth if we expect to see better numbers ahead.
In another report Motilal Oswal says that business confidence has shown mixed signals, and investment climate is yet to show a convincing pick-up. Capacity utilization at 70.6 per cent is near to its lowest levels of 70.1 per cent seen in first quarter of FY15.
But there are some activity seen in capital goods sector as order awards in January, 2016 at Rs 20,700 crore increased by 26 per cent YoY and 24 per cent over previous month as compared to an average order awards of Rs19,300 crore in the last 12 months. Further, project tenders invited during January 2016 stood at Rs 91,900 crore, up by 338 per cent over previous year. These orders are largely comprised of roads/railways (around 46 per cent of total tenders); irrigation tenders registered a strong growth of 386 per cent YoY to Rs 32700 crore points out the report.
The improvement is mainly driven by 36 per cent YoY in Central government projects, while tenders from state government gained by three per cent on a YoY basis, having registered growth after witnessing decline for four quarters.
FY16 has been a washout which is witnessed in share prices as well as earnings and revised analyst projections. Analysts are cautiously bullish for FY17 which corroborates with the underlying change in fundamentals. But then as at the start of FY16 one hopes fundamentals do not deteriorate fast for analysts to cut estimates.
