Lowest point?

Indian companies have not had it easy in the first two quarters of this fiscal with revenue and earnings growth declining perceptibly. The ongoing results season for the December quarter is unlikely to be any better, if one goes by the first set of results declared. The 238 firms, excluding banks and financial services companies that have declared results, recorded a 6.3 per cent decline in revenue over the corresponding quarter in 2014. Profit growth for this set of companies at 9 per cent is far lower than that recorded in the September quarter. These numbers may not exactly reflect the overall picture, which will be clear only when the numbers of all companies are taken into account. But the signals from the sample are far from comforting.

Many banks are likely to declare lower profits in order to make higher provisions for bad loans this quarter. This follows the RBI’s system-wide assessment of stressed accounts, under which banks must declare certain loans as non-performing assets even if there has been no default on payment. As a result of this, for instance, Axis Bank’s earnings has taken a hit due to the addition of ₹1,000 crore to the bad loan book. Other banks may suffer as well. While this kind of spring-cleaning is good for the balance sheet in the long term, it is not going pretty over the next two quarters. Technology companies that have been cruising along due to growth in North American business are now faced with a speed bump. With a stronger dollar hurting the manufacturing sector in the US, the growth on IT spends is likely to reduce. IT companies are also under pressure due to higher competition. The smaller ones will have to follow the lead of bigger players in increasing automation and improving utilisation rates to weather this phase. Fast-moving consumer goods companies are now being forced to pass on the benefits from input costs to consumers.

With major segments of the economy facing the heat, we could be near the lowest point in the earnings cycle. The operating profit margin expanded by 400 basis points in the December quarter due to the fall in commodity prices. This benefit is likely to aid corporate bottom-lines in the coming quarters as well. The benefit from lower input costs could shore up company earnings, despite a decline in revenue, as seen in Reliance Industries’ results. Domestic consumption, both urban as well as rural, is expected to be good in the coming quarters due to multiple factors, including better interest rate transmission, the Seventh Pay Commission and OROP payouts, and higher minimum support prices for various agri-commodities. At these levels, there is the possibility that the commodity rout may plateau. Together, there is an inkling of hope that the worst, if not already over, will soon be.

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