The Hindu Business Line : Earnings slowdown raises flag of caution

If India Inc’s earnings numbers for the September quarter brought hints of a possible deceleration in growth, the December quarter numbers reiterate that an earnings slowdown is indeed in the offing and cannot be dismissed as a flash in the pan.

Disappointments

Overall profit growth for 1,500 listed companies slowed to 19 per cent, from 56 per cent in the same period last year. The profit slowdown has been triggered by a slowing topline growth, a sure sign that companies are running up against demand, pricing or capacity constraints in their business, rather than pressures on margins alone. There have also been a good number of disappointments in the numbers.

A third of the companies have reported profit declines and there has been significant divergence in earnings within sectors such as engineering, construction and consumer. Positive surprises, if any, have come from unexpected quarters, in sectors such as banks and telecom.

Flags of caution

These numbers should raise flags of caution for investors in Indian stocks. Despite the recent corrective phase, the Sensex PE multiple is still at about 22 times trailing earnings, several notches above its 5-year average of about 18-19 times.

Much of the expansion in this PE multiple (from about 19 times in August 2007 to about 30 times when the market peaked in mid-January 2008), has come about in a short time span, amidst signs of an earnings slowdown for India Inc, which is a matter of concern. Recent events also suggest growing aversion to risk among global investors.

These are pointers that valuation levels for Indian market could now moderate and settle closer to the long-term average of about 18-19 times.

This combination of factors may make it difficult for the indices to recapture highs set in the months leading to January, any time in the near future.

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