Incipient recovery

India Inc’s earnings scorecard for the latest September-December quarter offers light at the end of the tunnel for stock market investors. Thirty-six of the Nifty50 companies managed to either match or beat consensus estimates of profit growth. The 50 firms registered healthy sales growth of 13.4 per cent, signalling a continued recovery from the setbacks of demonetisation and GST. Growth in operating profits (9 per cent) and net profits (7 per cent) came in below expectations, but these aggregates were weighed down by SBI’s mammoth losses. Excluding this outlier, Nifty50 firms managed a respectable 16.6 per cent net profit growth. The most important feature of the quarterly results though, was active participation by the non-index members of India Inc in the earnings recovery. Excluding financials, 1450 listed companies reported a 11 per cent sales growth, 16 per cent growth in operating profits and 17.5 per cent growth in net profits for the quarter.

Breaking down these numbers yields the usual quota of performers and laggards, but it is useful to take stock of the macro trends underpinning them. One, consumer confidence seems to have staged a decisive recovery by late 2017, with sectors such as FMCGs, automobiles, durables and jewellery registering strong top-line growth. It is tempting to attribute this to a low base effect from demonetisation. But given that GST accounting has suppressed sales numbers this year, net-net these firms have registered good sales growth underpinned by healthy unit volumes. Two, global factors, after playing party-pooper for the last few years, seem to have now turned the corner. Rosier economic prospects for the US, Eurozone and Japan have helped steel, metal and oil and gas giants deliver bumper profits this quarter. In retrospect, the Trump-induced rally in global commodities has proved far more resilient than originally expected, with improving growth forecasts and cutbacks in Chinese output fuelling the uptrend. Ironically, it is ‘defensive’ sectors such as pharmaceuticals and IT which have delivered a muted show. Banks, particularly corporate lenders, have also proved a blot on the big picture.

For stock market investors, it would certainly be good news if the earnings recovery at India Inc finally gets underway, after the string of misses over the last four years. Two big risks that can still scuttle this revival are rising interest rates and escalating input costs — which aren’t proving easy to pass on to consumers. But it would be a mistake to think that India Inc’s return to double-digit profit growth will provide new legs to the ongoing bull market. With the Nifty50 trading at 17.5 times forward earnings, these growth expectations are already baked into stock valuations. But then, Indian stock market investors can take comfort from the fact that, if reviving profits at India Inc bring about a greater convergence between stock valuations and growth rates, that would set a higher floor to any market meltdown.

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