Losing fizz

The Sensex’ 246-point gain in the symbolic Muhurat trading session seems to have buoyed market participants’ hopes that India’s five-year old bull market will resume in Samvat 2075, fighting off the bear attacks of the past year. But stock prices respond to earnings, not sentiment. On this count, the latest quarter earnings scorecard from India Inc points to a cloudy outlook for stocks, with profit disappointments threatening India Inc’s return to double-digit profit growth. A BusinessLine analysis of 939 companies that declared their July-September 2018 results found that, despite a notable acceleration in revenue growth to 21 per cent, these companies managed muted operating profit and net profit growth at 7.2 per cent and 3.3 per cent, respectively. The numbers declined sequentially from 12 per cent plus in the June quarter.

Three trends scuttled a broad-based earnings recovery. One, though most sectors showed signs of demand pick-up, the sharp spike in raw material costs prevented this from trickling down to corporate profits. Manufacturing firms saw their material costs to sales spiking by a hefty four percentage points in the last one year, thanks to spiralling global oil and metal prices, a weakening rupee and rising tariffs. Companies were quite unable to pass this on in full to their end-users and took a significant hit on operating profit margins from 17.1 per cent to 14.8 per cent. While there has been relief on both oil prices and the rupee lately, margin recovery will depend on these trends sustaining. Two, despite good loan offtake, banks continued to struggle under the twin burdens of bad loan provisioning and higher funding costs. While private lenders managed to stabilise profits, public sector banks (PSBs) took a battering. The profit outlook for PSBs is now highly reliant on additional capital infusion from a fiscally-constrained Centre. Three, fast-growing service sectors such as airlines and telecom wallowed in red ink as competitive pressures hurt their tariffs, even as costs spiralled.

That said, the bright spots came from FMCG firms which clocked strong volumes, metal firms which cemented margin gains and turnkey infra firms with very strong order flows. Pharma and IT firms also delivered profit surprises after deal wins and a rupee boost. The Nifty50 and Sensex30 constituents reported almost twice the profit growth of the broader universe, helped by the global leg to their operations. But with their profit growth still in single-digits, analysts are already revisiting their wildly optimistic consensus projections of 18-20 per cent growth for FY19. The fear of India Inc missing their profit estimates for the eleventh consecutive year is now looming large over stock valuations. Given that liquidity factors for the market with upcoming elections and skittish foreign investors are not supportive either, it will need more than a good Muhurat session to put the animal spirits back into Indian equities.

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