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Corporate Numbers For Q4FY11 Were Good; But… FY12 Could Be Dicey?

Monday, April 11, 2011

As a new financial year rolls out on us, the question that is now most pertinent is about the financial performance of companies in the final quarter of the Fiscal (FY11) that is just over. There has been growth in both earnings as well as profit. But, it is expected that margins will be under pressure due to a wide variety of extraneous factors and the pressure will continue going forward, reports Manik Malakar 
“We expect Sensex (ex-oil) earnings growth to slow down to 10% year-on-year in the January-March quarter, backed by strong sales growth of approximately 17%, but with deteriorating margins,” was the opinion of Religare analysts Dr. Tirthankar Patnaik, Manoj Singla and Prasad Shahane in a preview of the Q4FY11 earnings of Sensex companies. They opine that EBIDTA (Earnings before Taxes, Depreciation and Amortisation) would be hit by 82 basis points (one basis point is one/hundredth of a percentage point) and key ratio PAT (Profit after Tax) at 84 basis points.
And this pressure on the margins of the companies is set to continue as input costs do not seem to be abating. This is even as sales remain strong on the back of India’s burgeoning economy. “Rising commodity prices (essentially oil now) and hardening rates continue to have a meaningful overhang on the markets,” said the Religare analysts. However they are bullish in the medium term for the markets as broader economic growth is pegged at 8 to 9%.
It is geopolitical factors that will now be the prime driver. Oil however will be a determining factor on the markets going forward. “Complacency on the oil front seems to have set in, as the government financed a swelling oil subsidy by spending enhanced fiscal revenue acquired from 3G/BWA (Broadband Wireless Access) revenue,” said Navin Agarwal and Rajat Rajgarhia of Motilal Oswal.
Motilal Oswal has predicted an EPS (Earnings per Share) growth for Sensex companies in FY12 of 19 per cent. In FY2009 and FY2010 there had been severe earnings downgrades and a possible downgrade in FY12 will be foremost on the minds of investors going forward, since macro-economic factors are severe.  
Similarly Motilal Oswal has stated that PAT growth in the Q4FY11 period would be 22 per cent on a year-on-year basis for most of the companies that they cover. Also encouragingly, growth would be across most sectors with telecom being the only laggard.
So what lies ahead for FY12? And what factors from FY11 will continue to affect the economy?
First some good news… liquidity may ease up at least in the First half of FY12. Analysts estimate that deposits may grow by 18 per cent and that credit may grow by 20 per cent. Other factors that would contribute to liquidity improving include: unlocking of the cash kept by the government with the RBI and lower government borrowing. “Thus the liquidity situation is expected to improve significantly in the First Half of FY12 followed by deterioration once again in the Second Half of FY12,” said the Motilal Oswal analysts.
 “While the long term growth prospects of the economy seem bright given the strong fundamentals of the economy, the short term outlook needs to be assessed in context of the emerging macro-economic dynamics that might support or limit India’s economic growth,” said Dr. Arun Singh, Senior Economist at Dun & Bradstreet India.
First, investment in India has been moderating if one goes by indices like IIP (slowdown in Capital Goods in December 10 to January 11) and Gross Fixed Capital Formation (lower growth in Q3FY11). “Thus, the momentum of investment, which largely will be influenced by the inflation and interest rates scenario, will be crucial for determining the growth outlook for the next fiscal,” said Singh.
India’s Current Account Deficit is a prime concern. The current account deficit is a gap between imports and exports. A gap in the current account means that not only will the Rupee come under pressure, but also India’s credit rating will suffer. So India’s corporates will find it expensive to raise loans or capital from foreign sources.
Next, the GDP growth is not expected by analysts, to be very positive. There are a variety of factors like high interest rates, burgeoning input (commodity) costs and muted investments are all expected to limit GDP growth at least in the First Half of FY12. The global geopolitical scenario is also not very encouraging, with the current unrest in the MENA (Middle East & North Africa) a factor in keeping crude prices at a high level.
However, D&B India expects that inflation will moderate in the Second Half of FY12. This along with domestic demand would be positives for the Indian economy. “Moreover, during the course of the year the economy is expected to get adjusted to rising interest rates,” was the slightly scary prediction from Singh.
Investments are a key driver for growth and India has, in the recent past seen some inflows. But we cannot be sanguine about the same. According to brokerage Prabhudas Lilladher much of the higher inflows have been on the back of India’s significant underperformance to regional and global peers. Various issues like poor governance and a consequent lack of reforms, high oil prices and high interest rates are a concern. “The redeeming factor for the Indian markets remains the fairly steady and strong earnings performance by Corporate India,” said the PL Research Team.
Moreover, domestic demand would be driven by improving consumer sentiment, a likely moderation in inflation (which would stimulate demand), good employment levels and greater disposable income levels.
At the end of the day the one silver lining on a dark cloud will be domestic demand. “D&B expects the growth in private final consumption expenditure to have improved to 8.2 per cent during FY11 from around 7.4 per cent during FY10 with domestic demand conditions recuperating at a rapid pace,” said Singh. The market performance in FY11 has accentuated the preference for low risk, high growth domestic themes, concludes Motilal Oswal.
Market predictions
We are moderately bullish on the markets from a 9-12 month perspective – Prabhudas Lilladher
Our FY12 estimates suggest Sensex EPS growth of 19% to Rs. 1,252, a marginal downgrade over the past two quarters – Motilal Oswal
FY12 estimates still bake in around 19% bottom-line growth which could have some steady downside in the months ahead – Elara
Profit growth would be led by sectors such as Financials, IT Services, FMCG, Infrastructure and Construction, while Metals, Telecom, Utilities and Cement would remain laggards – Religare
INSET: While the long term growth prospects of the economy seem bright given the strong fundamentals of the economy, the short term outlook needs to be assessed in context of the emerging macro-economic dynamics that might support or limit India’s economic growth

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