Earnings growth fails to match Sensex tempo

Earnings growth may be the lowest in the past eight quarters.

While the Sensex is scaling new heights, fundamentals may not be moving in tandem. According to research houses, year-on-year corporate earnings growth may be the lowest in the past eight quarters.

On an average, over the past three years, earnings growth for Sensex companies has exceeded 25 per cent, but the ensuing quarters may not be the same. Since June 2003, while corporate earnings has been on a steady upmove, earnings growth has been falling steadily.

Says Jyotivardhan Jaipuria, head of research, DSP Merrill Lynch, "Earnings growth has been decelerating in the past few quarters and this quarter could be even slower."

According to DSP Merrill Lynch, Sensex earnings could grow by 21 per cent this quarter. Excluding the only oil company ONGC from the Sensex, the index companies could grow by 18.5 per cent.

Merrill expects the industrials, cement, software and metals sector to show the fastest growth year-on-year, although the earnings momentum in metals is decelerating. Sectors, which are likely to show poor growth this quarter, are automobiles and pharmaceuticals.

According to a research report by Kotak Securities, "Earnings growth momentum is slowing down, whichever way analysed."

The growth in y-o-y growth in quarterly earnings of Sensex companies, even after excluding the energy and financial stocks which posted discouraging peformance, have been declining continuously, baring one quarter in between (See chart).

According to Nandan Chakraborty, head of research, Enam Securities, this quarter could still see good growth while the slowdown may start setting in from the next quarter onwards.

"We expect the quarter to be exceptional with investments being the key growth driver. But down the line we could see some slowdown," says Nandon Charaborthy.

The high base of last year has essentially set the stage for a slowdown, say analysts. Especially, in sectors such as automobiles, the growth has been outstanding in the past.

So a slowdown in the coming quarters may only be inevitable, analysts say. Besides, as warned by the Infosys management in the last quarter, the sequential growth for the software sector may not be great, say analysts.

Market experts expect that a less-than-expected rainfall and rising crude oil prices could be the biggest threats to corporate performance in this following quarters.

Though stock markets have pretty much ignored the rising crude prices thanks to strong liquidity flows, rising crude prices will dent corporate performance going forward, analysts say.