If GDP’s up 7.5%, why are profits down 24%?
The disconnect between the macro-data for the economy and corporate earnings is getting to be even more jarring; GDP for the quarter-ended March 2015 came in at what would seem is a robust 7.5% while profits for a sample of 1,991 companies have fallen 24% year-on-year. Indeed, the gap between the macroeconomic data and high frequency indicators has been wide for more than a year now and should ideally have narrowed. However, despite the promise of easing inflation, lower interest rates and a better current account balance, analysts have been compelled to downgrade corporate earnings yet again following a disastrous earnings season. For the Sensex, the increase in earnings in FY16 is now expected to be a more subdued 15% compared with a rise of 21% that was estimated in November last year. What’s important is that the 15% rise comes off a much smaller base because of the poor earnings reported in Q4FY15. The compulsion to downgrade earnings comes as much from the performance—weak volumes, insufficient price power—as from cautious commentary. Engineering heavyweights such as Larsen & Toubro have been saying for some time now the private sector remains reluctant to add capacity.
That is not really surprising given that a fair amount of excess capacity already exists. Even in sectors such as power, where there is concern about a shortage, NTPC’s plant load factor dropped in Q4FY15. Where companies produce, they are not able to get good realisations; at SAIL, realisations fell 6% yoy in the quarter driving down the ebitda by a steep 24% yoy. Indeed while expenses have trended down—3% yoy for the same sample—the operating profit margins have slipped 75 basis points yoy, reflecting weak demand and virtually no pricing power. To be sure, there are signs of a recovery—Tata Motors reported an ebitda profit after five quarters of losses—but it could be a good 18-24 months before the capex cycle turns. At BHEL, the order book at the end of March 2015 stayed flat at around R1 lakh crore, though at L&T, order flows have been fairly brisk. The manufacturing PMI for May, it would appear, has perked up, but as an HSBC analysis shows, once the April and May numbers are averaged out, the number is running at the same pace as in March. With sufficient foodstock to take care of a less-than-normal monsoon scenario and demand unlikely to even revert to the mean in a hurry, inflation, it would appear, has been reined in, making the case for a rate-cut even stronger. Interest costs, as a share of sales, may not appear to be meaningful—the savings from a 25bps cut on the interest bill for FY15 of R1.65 lakh crore—would be close to R400 crore. However, it would bring many smaller companies some much-needed respite, helping them brace for what looks to be another tough year.