Apr 12, 2013 10:59 AM IST | Source: CNBC-TV18

See Q4 earnings growth at 13 qtr low:Prabhudas Lilladher

India Inc's top line growth of for the fourth quarter FY13 will be at a 13-quarter low, says Ajay Bodke of Prabhudas Lilladher, reflecting a sharp dip in aggregate demand. Talking to CNBC-TV18, he says that revenues for Nifty companies are expected to grow at around 6 percent on a year-on-year basis.

India Inc's topline growth of for the fourth quarter FY13 will be at a 13-quarter low, says Ajay Bodke of Prabhudas Lilladher, reflecting a sharp dip in aggregate demand.

Talking to CNBC-TV18, he says that revenues for Nifty companies are expected to grow at around 6 percent on a year-on-year basis. Export growth for the first 11 months is down 4 percent and the investment cycle completely in a moribund state. All these factors are bound to hit India Inc’s Q4 results.

Also read: IT firms may report moderate growth in Jan-Mar

Below is the edited transcript of Bodke’s interview with CNBC-TV18

Q: What’s the expectation from the earnings season this time around? Not expected to be spectacular in the least, but how are you heading into it?

A: Our preview clearly shows that the revenue growth for the fourth quarter FY13 will be extremely tepid. In fact, it will be at a 13-quarter low. The revenues for Nifty companies are expected to grow at around 6 percent on a year-on-year basis. The last time we had a growth which was in that vicinity was sometime in the third quarter of FY10, when the Nifty revenue growth was around 9.8 percent.

So we are at a 13-quarter low so far as top line is concerned. It is clearly symptomatic of the caving in of the overall aggregate demand that one has seen in the economy with consumption which used to be mainstay of economic growth, which was at 8 percent between FY06 and FY12. It is now expected to grow at just 4.5 percent as per CSO estimates for the current financial year.

The export growth for the first 11 months is down 4 percent and the investment cycle completely in a moribund state.  So I think all three demand drivers of the economy being in an extremely worrisome state clearly are reflecting in the bellwether company’s top line growth.

So far as the bottom line is concerned, the EBITDA growth, we are expecting at around 5 percent, which will be lagging the topline growth of 6 percent. The bottomline growth will only be at 3.4 percent for Nifty companies, essentially reflecting the fact that any moderation in the commodity prices that one has seen on a year-on-year basis as well as the fall in interest rates is yet to flow down to bottomline numbers of Nifty companies. So all in all, an eminently forgettable quarter in our opinion, so far as results are concerned for this year.

Q: I wanted to come to the point on whether or not such a bad predictable earnings season is actually factored into the markets or not? If in case it does come in, in terms of the levels that you are speaking, do you think that the Nifty could see the downside?

A: Let’s look at both the sides of the equation. On the negative side, I think there is clearly worry on the current account deficit and on your very own programme a month back. I think we were one of the first ones to flag off about how policy makers are only thinking in terms of how to finance the deficit and not how to curtail it. We are yet to see a clear coherent policy of upping exports and in terms of controlling imports. So, the merchandise trade deficit one needs to look at, how do you tackle that?

The second point of worry obviously is that the sharp drop in planned expenditure from Rs 5.2 lakh to Rs 4.2 lakh in last financial year I think is today reflecting in terms of a large number of companies be it in infrastructure sector, capital goods sector, engineering sector.  But on the positive side, I think with the same planned expenditure is expected to be pumped up by roughly the same amount of Rs 1 lakh crore, and hopefully I think that money should start flowing back into the economy. As you go forward over the next two-three quarters, one will start clearly seeing a demand emanating from sectors such as roads or metros or urban infrastructure and also sort other soft sectors like health and education, where the sort of allocations have gone up in the current Budget.

On the monsoon side, I think the early estimates from the India Meteorological Department (IMD) clearly point to a near normal monsoon. Last year, we had agriculture which was impacted very severely because of late monsoons.
The global liquidity continues to be extremely supportive. The monetary shock and awe announced by the Bank of Japan (BoJ) clearly I think has opened the flood gates and I think although in the immediate term, people who are extremely underweight on Japan have started moving back and reducing their underweight positions in Japanese equities.

Money also is flowing into America because of stronger, firmer footing there but at some point as the Indian economy finds a firmer footing over next couple of quarters, some money could come India’s way.
Towards that end, the valuations also are supportive.

I think today you are trading at 13 points, three times FY14 earnings. If you look at last ten years averages, we are at around the same levels, maybe a percent or two here and there as far as averages are concerned. So, I think there is scope for the market to have a short-term bounce back which is what we are seeing right now.

But the challenges remain in terms of the macro economy, in terms of balance of payment, in terms of current account deficit. If risk aversion were to spike up as we saw when concerns about premature withdrawal of ultra monetary policies happen, I think we are so much dependent on fickle FII flows and on short-term debt flows that the rupee could hit the air pocket. It could get wobbly and then we could have all sorts of problems.


Q: What is your expectation in terms of the politics as well as the macro combination for the markets? What would you like to see in terms of any macro movements coming in and key indicators as well as possibly once the Budget session restarts?

A: As I mentioned the three bills that the market is focused on essentially is the pension, insurance and land acquisition bill. Although, the land acquisition bill, industry has a lot of problems about some of the specific clauses in the bill and feels that it will lead to a sharp jump in land acquisition cost. However, at the same time they feel that once it is cleared there will be some finality and a clear roadmap about land acquisition and a large number of projects that are stuck for want of land acquisition could get expedited.

On the macro side, the second point is the Prime Minister’s (PMs) address to the Confederation of Indian Industry (CII), in which he mentioned that of around 40 oil exploration and development blocks, which are pending for approval for many years,  five have been cleared and 31 of them have been expected to be cleared in the next two weeks.

This will bring in investments to the tune of USD 20 billion, so that is a very large number and in the current context when there is scarcity of gas and the KG-D6 volumes have fallen from upwards of 62, less than some 20 mmscmd or thereabouts, one needs to kick-start investments in oil exploration and development. The other point he also mentioned is that some 37 million tonne of coal mining projects are expected to get approval in next few weeks’ time. At the same time, there is expectation that the Cabinet Committee on Economic Affairs (CCEA) will consider the coal pool pricing issue and some compromise will be worked out over there.

The Central Electricity Regulatory Commission (CERC) verdict has been taken very positively by the market in terms of not just the Adani project, but also some of the other large Ultra Mega Power Project (UMPPs) like Reliance Krishnapatnam as well as Tata project that they also should get some relief.

So, coal, oil as well as power are three sectors where a lot of reforms on the administrative end are happening and my opinion is that because of precarious political position currently legislative agenda is very difficult to push through, but reforms through the executive fiats are happening, which is very positive in these infrastructure sectors. The other point is that the trade deficit in January and February is narrowing, which is again a positive point because I mentioned about current account being a concern there.

Thirdly, so far as the economy is concerned, with the monsoons expected to be normal, consumption should hopefully turn normal over the next few quarters.
So we need to guard against this extremely important variable of current account deficit. The efforts from the policy makers to revive investment growth are something which we will be looked at closely. The second point I will make is, you just mentioned in the previous segment the the government is making all efforts to push the insurance bill through.

Also, the pension bill and the land acquisition bill. These three bills would be closely watched by the market. If they go through, I think in the medium term, the markets would have seen the worst and one can look at some sort of a medium term rally to come from there.

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