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The fall in stock markets is unlikely to see a reversal soon, as the visibility of earnings growth has diminished considerably. With the Reserve Bank of India (RBI)’s measures effectively choking liquidity, earnings growth is likely to improve in the coming quarters, unless the central bank eases rates.
Earlier, analysts had expected earnings would record 10 per cent growth. Now, growth forecasts for next year have been slashed to about three per cent, owing to deceleration in sales. Amar Ambani, head of research, IIFL, says, “If the first quarter is any indication, the slowdown in earnings is clearly visible. I am thinking if things worsen, there could even be negative earnings growth.”
Against an earnings estimate of Rs 411 for 2013-14 on the Nifty, earnings are now expected at Rs 381 on the Nifty — mere three per cent growth. The expected growth in earnings for 2013-14 was about 10 per cent.
The downward revision in profit growth impacts valuations in the range of a price-earnings multiple of 13.8. If the earnings slip below these levels, the market could correct further, as investors are wary of taking risks. Saurabh Mukherjea, head of equities, Ambit Capital, says, “We haven’t revised our earnings estimates yet. If RBI continues its tight money policy, we might see low single-digit growth. If RBI eases, profit growth could be in high single-digits.”
A combination of falling sales and rising interest rates has a major impact on profits; a sales slowdown results in lower earnings. R Sivakumar, head (fixed income), Axis Mutual Fund, says, “The down-leg in the economic cycle is certainly playing. On the broader corporate side, there is earnings de-growth. Both contraction in sales growth and rising interest costs are impacting profitability.”
Experts say sales growth has been falling considerably and the demand environment has been slowing. Hitherto resilient sectors such as consumption are also seeing a slowdown, as demand has fallen. And, experts aren’t ruling out a further sell-off by foreign investors if the tight economic policies and lower sales growth continue. Ambani says, “The markets could fall below 5,000 on the Nifty, if there’s multiple contraction across sectors.”
The only comfort for corporate earnings could come from the rural sector, as the monsoon has been good. This is expected to raise rural incomes and drive consumption and sales growth for companies, experts say.
As the Indian corporate sector would soon enter the busy credit policy season in October, high interest rates could hit borrowing plans and postpone recovery. Sivakumar says, “With RBI tightening liquidity, the recovery has been pushed back a little more. That’s the reality of the situation. At the end of the day, the currency is a reflection of your growth potential.”
