Slower earnings growth?

The corporate results season has started, with the first of the fourth quarter results trickling in. India Inc has been able to maintain a heady pace of growth, both in top line and bottom line numbers, over the last few quarters, but there are signs that the growth momentum is flagging.

At the macro level, the February data for the Index of Industrial Production show a marked deceleration in growth, while the numbers for the infrastructural index even show a year-on-year decline.

The corporate numbers for the fourth quarter will therefore be closely watched for any signs of a slowdown in revenue and earnings growth and pressure on margins.

However, these pressures will be far from uniform across sectors, and within sectors there could well be companies that buck the trend.

In fact, quite a few sectors should continue to show high growth. Metals, for example, should do well, considering the rise in prices effected by the steel and aluminium companies, and the improvement in copper TC/RC margins, although the gains will also be offset by rising input costs.

Another sector that is supposed to do well is IT, thanks to higher volumes, which have been indicated by increased hiring in previous quarters, and also stable pricing.

The market, however, may be more interested in the guidance given by Infosys for FY06. Hotels too are expected to continue to post good results, due to booming business conditions and higher tourist inflows. In spite of lower subscriber growth, telecom companies should continue to see robust profits.

The other bright spot on the corporate horizon has been the capital goods sector, since capital expenditure by companies has resulted in bulging order books.

Some sectors such as banks are likely to show mixed results. The focus in the banking sector will be on gauging which banks have been able to profit the most from the surge in non-food credit growth, and whether the rise in advances has been enough to offset the loss of capital gains from selling investments.

Cement is another sector where profits are not expected to be spectacular, in spite of some rise in prices during the last quarter. The FMCG sector should continue to recover, thanks to the cessation of price wars, and due to a recovery in volume growth.

One factor that could impact profits in the last quarter, however, is VAT. De-stocking by auto dealers as well as by chemists ahead of the introduction of VAT is likely to have hurt sales in the auto and pharma sectors.

The auto sector will also be hit by rising raw material prices, which will squeeze margins, while the high base will lead to lower top line growth. High fuel prices will hit companies across the board, with the oil-marketing companies being the worst affected.

However, while gross refining margins have dropped, the petrochemicals business has been doing well. But interest costs may go up a bit for many companies, while "other income" is likely to be lower.

In short, while the Q4, FY 2005 results for India Inc are likely to present a mixed picture, the consensus appears to be that, so far as quarterly earnings growth is concerned, the best is behind Corporate India.

It is this factor, taken together with the concern about liquidity, that is behind the nervousness in the stock market.