Broking houses fear the beginning of a growth slowdown

Broking houses fear the beginning of a growth slowdown
10 Jul, 2008, 0324 hrs IST,Nishanth Vasudevan, ET Bureau

MUMBAI: Top Indian companies may post their slowest quarterly profit growth in over five years for April-June, reflecting the inevitable impact of rising input costs and hardening interest rates. While analysts claim current stock prices, which have fallen almost 35% since January, largely factor in the quarter’s profit slowdown, investors will look for cues on the magnitude of the effect of adverse macro-economic conditions on business outlook. “Numbers will likely count a little less this time; watch for profit and growth guidance, interest and cost pressures, order books and cancellations, funding and capital-markets sensitivity and body language,” said Citigroup, in its earnings preview note. Investors are more concerned about deteriorating business sentiment than profits, as they are hopeful that softening of commodity prices and interest rates could revive profitability. But a reversal in an upmoving business cycle would take longer to revive. Gearing up for more downgrades, analysts said any sharp slowdown in earnings guidance or order books could trigger a further sell-off. “While earnings may surprise on the upside again and even factor an exaggerated slowdown in Q1 earnings due to non-recurring factors, our full year FY09 EPS (earnings per share) growth of 18% looks set to be downgraded in the earnings season,” Merrill Lynch said in its earnings preview note. Analysts expect most earnings downgrades for the entire fiscal in banks and capital goods, while software could see upgrades in the wake of a falling rupee against the dollar. In the quarter under review, Sensex companies may report a 10-11% growth in profit, as against 28% in the same quarter last year and 22% in January-March quarter of 2007-08, as per the average earnings estimates of nine brokerages by ET.
But sales growth in the June quarter, is expected to grow steadily at 24-26%, compared with 22% in January-March and 16% in the corresponding quarter last year. While capital goods, software, FMCGs and metal sectors are expected to post steady earnings growth this quarter, auto, cement, aviation and select banks may see a slowdown. Analysts expect operating profit margins — a measure of the operational efficiencies of companies’ core business — to shrink this quarter due to rising raw material costs. “Margins for financials (higher deposit rates, slowing credit growth), and cement (correction in prices) and automobile stocks (costlier credit, lower truck sales, sluggish demand) may see a dip. Forty nine per cent of the Sensex companies are seeing an EBITDA (operating profit) margin shrinkage compared with 40% in Q408,” IDFC-SSKI Securities said in its earnings preview note. Income from non-core operations or activities such as investments in the stock market or bond market, which has been crucial in driving profit growth in the last few years, may drop due to fall in stock markets and foreign exchange losses on foreign loans.