Weakening real activity has meant that top-line growth has been in freefall, dragging down profits along with it, says Nomura Equity Research in its research note on September quarter earnings preview
 

Net sales of Indian companies have been growing at an ever-slower pace over the past three years due to external considerations like inflation, depreciating rupee etc., according to a research note on September quarter earnings preview by Nomura Financial Advisory and Securities. This observation is clearly shown in the graphs below:

With topline growth falling, the bottomline has been under pressure in most companies. Nomura sums it up with the remark, “Weakening real activity has meant that top-line growth has been in freefall, dragging down profits along with it.” This observation is shown in the graphs below:

Sectors with high operating and financial leverage have to live with increasing pressure on operating and net profit margins, warns Nomura in its India Equity Strategy note. Industries facing domestic economy continue to remain a drag and are expected to make negative contributions to aggregate profit growth in the quarter.

The bright side of the problem has been that while competition has put margins under pressure, significant relief from weak raw material prices has been an important offsetting factor in protecting sequential downside to gross margins; Nomura notes that despite being in freefall, net sales growth has exceeded cost of goods sold growth over the past five quarters.

Even though recovery is expected soon, there is a warning that it may not benefit all investors in the stock market. Recovery is not broad-based - a large part of the year-on-year growth in market aggregates is on account of a handful of exporting sectors, beneficiaries of a depreciating rupee and the nascent global economic recovery. More specifically, excluding non-PSU oil & gas, autos (led by JLR), IT services and pharma from aggregate numbers: net sales growth falls from 14.1% to 8.6%; operating profit growth falls moderately from 15.5% to 13.3%. Net profit growth falls from 9.4% to no growth, points out Nomura.

Sector-wise performance and forecast is shown in the graph below:

The research note concludes that as the market recalibrates its expectations of a rate cutting cycle in the face of improving current account deficit numbers and the potential delay of the Fed taper (in light of the negative implications of the current fiscal impasse in the US0, valuation does not offer much comfort. The 12-month forward consensus-based earnings multiple for the market is currently at 13.2x (versus a five-year average of 14.3x) is not encouraging given the negative outlook on growth, with possible exception of upside from export growth.

The percentage change in corporate earnings for Sensex companies during the last quarter is shown below: