Corporate earnings likely to be hit

Corporate earnings in this quarter may take a hit on account of the equity exposure that companies may have taken following a bad quarter for the Indian markets, say market analysts.

The financial risk in markets has been growing in the last two quarters, reflected in the growing equity volumes, forex volumes and the volatility that was seen in the commodities market.

However, since January 1, 2008, the Bombay Stock Exchange (BSE) benchmark index, Sensex has fallen by 4,163.84 points or 20.5 per cent.

"In the last two quarters, the financial risk in market has tended to go up. You could see it in the equity volumes, the forex volumes that were taking place and the volatility that you were typically tending to see in the commodities space. Then you step back and see that there have been a few events "� forex exposures coming through. Potentially, this quarter holds the risk that you have been buoyed by corporates making equity returns over the last two or three quarters. That might come at because this quarter has tended to be a little hard. At this point in time, you do have a certain amount of financial risk that could play itself out over the next quarter," said Aditya Narain, director and head, India, Citigroup.

"It does not hurt the underlying businesses or the growth trajectory. But it hurts earnings because the amount of risk that you are factoring into the stock valuations increases. From that perspective also, you are probably going to see a market that will be a little more cautious. This is a time to be cautious and look for visible growth," added Narain.

Corporates typically "play" the markets when they have excess cash. Market analysts expect such a hit in some companies' balance sheets since a growing number of them have tried to cash in on the equity market boom of the last couple of years.

"Any company that has a large treasury book where a significant portion of the other income comes from investments into mutual funds or the equity markets will take a hit. It would be the bigger companies, especially the ones that have big investment plans and have raised sufficient cash for acquisition purposes," said Amar Ambani, vice-president (research), India Infoline.

On Monday, shares of engineering company Larsen and Toubro (L&T) plunged 12.48 per cent, its steepest single-day fall in four years, after at least four brokerages published reports that its overseas arm, Larsen and Toubro International FZE, was expected to post commodity hedging losses this financial year.

The Sharjah-based arm of L&T may post a loss of Rs 200 crore because it bet against a decline in prices of zinc and other commodities, L&T Chief Financial Officer Y M Deosthalee had said.