There is little evidence on the ground to show industry is staging any meaningful recovery; bank credit to corporates and individuals is running at around 14-15%, that too on a low base. Few companies, if any, appear to be adding capacity because orders announced by the top-30 listed industrial companies totalled just R22,000 crore in the three months to June, the smallest in 17 quarters, save one. Moreover, the number of projects being shelved in Q4FY13 remained at its highest level in eight years, with the exception of one quarter, although there has been a pick-up in the value of projects announced. In the auto sector, usually the best leading indicator of industrial sentiment, domestic sales of CVs at Tata Motors were down 19% yoy in Q1FY14 while at Ashok Leyland they fell 21%; sales of passenger cars at Maruti dipped 7%, two-wheeler sales for the industry were also down 7%. Which is why Kotak Institutional Equities estimates that net profits for the universe of companies that it tracks (ex-energy) will fall 11.5% yoy in Q1FY14 and that for the BSE 30 set of stocks by 4% yoy and 19.3% qoq; the numbers will be dragged down by results in the cement, mining and metals sectors.
The problem begins with the top line given how weak demand is driving down volumes and leaving companies with little pricing power no matter how strong the brand; net sales for the Sensex companies are tipped to grow by less than 5%, while for India Inc the number could be closer to 9% compared with 6% in Q4FY13. With prices of commodities softer, and expenditure being reined in, however, operating margins could expand although how the sharp depreciation of the rupee will impact earnings, given how imprudent corporates have been with hedging their exposures, is hard to tell. The commentary after the Q4 earnings season was cautious; AM Naik, chairman of Larsen & Toubro, for instance, was fairly sure there wasn’t going to be an upturn in investments this year. L&T, in fact, set aside some R17,000 crore of orders which it believed might not get executed. What can help a bit is that, this time around, there will be more efforts by companies to offload assets to free up cash. Nevertheless, not too many of the highly leveraged firms have been able to pare their debt so that would remain a concern for the Street. As they have for a long time now, analysts will look for signs of a turn in the capex cycle; if there isn’t any, it is possible earnings estimates for FY14—currently between R1,300 and R1,350—could be downgraded.