Earnings may decline, sales flatten out for March quarter

Earnings may decline, sales flatten out for March quarter
The Hindu Business Line, April 15, 2009, Page 1

Realty, metals expected to post large profit declines.

Aarati Krishnan

It is time for a reality check after the euphoric 34 per cent rise in stock markets over the past five weeks.

As Infosys flags off the March quarter earnings season on Wednesday, India Inc is expected to report one of its worst performances in recent years.

Sales for Indian companies are expected to be flat or even shrink a little for the March quarter as they fell prey to insipid demand, a cutback in capital spending and lower prices and realisations.


The numbers may show cost pressures have eased off a bit, thanks to the sharp fall in prices of crude oil and commodity inputs.

But companies are unlikely to have reaped the full benefits of lower input costs this quarter.

Interest costs, the key variable contributing to profit falls recently, are expected to remain high, as only select top-notch borrowers have benefited from recent interest rate cuts.

In this backdrop, market participants are forecasting a decline or a modest growth in profits for most sectors of India Inc.

Sales slowdown

Leading brokerage Motilal Oswal Securities expects Sensex companies to report a 3.4 per cent decline in their sales and a 15.2 per cent fall in profits for the March quarter. “Most sectors would report either a decline or single-digit growth in earnings with just 3 out of 16 sectors we cover, reporting double-digit earnings growth. The decline in aggregates would be largely due to sharply lower earnings from metals and real estate,” says the brokerage in its Results Preview.

IDFC-SSKI is a tad less pessimistic, forecasting a 9.4 per cent fall in the profits of Sensex companies, with the picture becoming much worse (a 13.3 per cent decline), if oil companies are left out. IDFC-SSKI predicts that the Sensex companies will close the quarter with a measly 0.9 per cent sales growth (ex-oil and banks). It expects a 9.7 per cent contraction in operating profits due to cost pressures.

Neither brokerage has factored in write-backs from AS 11, in their estimates.

The exclusion of the “forex loss” element from the reported earnings may end up painting a rosier earnings picture for several highly leveraged companies.

Realty, metals

While overall earnings remain sombre, the saving grace may lie in the huge divergence in results, expected between sectors.

Real estate and metals are the sectors expected to report the worst set of March quarter numbers. Profit estimates for real estate companies are bleak, as brokerages estimate that flagging demand, lower prices and spiralling interest costs will reduce profits by anywhere between 70 and 85 per cent over last year, for leading players in the sector. Metal companies too are forecast to register sharp falls of 50-90 per cent in quarterly profits, on the base effect, as lower realisations reflect in margins, even as input costs remain high.

Oil marketing companies are expected to see a better profit picture with lower crude prices cutting under-recoveries.

Telecom, power, banks, infrastructure and FMCG are sectors expected to clock reasonable sales as well as profit growth, with forecasts for a 5-15 per cent earnings growth.

The prognosis for IT is mixed, with predictions for a flat to slightly positive topline, while profits may grow 7-11 per cent relative to last year.

Market hopes

Market participants expect sectors such as automobiles and cement to improve their performance sequentially (helped by better sales and despatches respectively), though profits may continue to fall year-on-year.

Given this backdrop, it is interesting that realty and metals, the sectors expected to unveil the poorest set of numbers, are the ones that have led the recent stock market rally.

The 50 per cent rise in the BSE Realty index and the 47 per cent surge in the BSE Metal index, make them the best sector performers over a month.

Is it a case of stock prices already discounting the worst, or being swept up by optimistic expectations?

That will be clear as stocks in these sectors react to the results announcements over the next few weeks.