A Good Q4 Show Expected

"The world hates change, yet it is the only thing that has brought progress."
                                                                     - Charles F. Kettering

By Haresh Soneji, CNBC-TV18

Yes, you read the headline right. The AS11 dilution and softer provisioning norms by RBI will enable Q4FY09 and FY09 numbers to look good. In an environment, where the equity market factored in a negative earnings growth of 10-15%, a flattish growth surely is one big positive. For a market dying of positive numbers, this is something to cheer for the Bulls. But, there is nothing for real. It's all 'window dressing', all over again.

Since Timothy Geithner's big 'Save The World' bailout, the Bulls, the world over, have wasted no time squeezing the Bears. From the second week of March, the equity markets around the world have surged 20% plus, with the Sensex up almost 35% from its March lows. The question is - Is there more steam left?

The answer to the above question is perhaps well explained by an understanding of a change in the reporting environment. The world over there is brouhaha on the way mark-to-market (MTM) losses are reported. Regulatory bodes around the world are working on easing this reporting rule, by capitalizing the losses in some way or the other. India's a notch ahead, by allowing corporates to amortise foreign currency losses instead of charging to P/L. The AS11 dilution option lies with India Inc., but if adopted it has to be followed retrospective Dec '06. Several large companies in India have always been charging such losses to the B/S. The list includes big names such Reliance, Bharti, ADAG group, among others.

What does this do to profits? Yes, inflate them. Several companies CNBC TV18 spoke to since the circular was announced mentioned that they would shift to reporting as per Schedule VI of the companies act. Don't believe me. Look at the BSE/NSE announcement pages to see the trend. Companies have postponed declaring their Q4 and full year numbers as compared to the previous March quarters. The derivation is simple. Many small and mid tier companies are burning the midnight oil in refurbishing their numbers. So, lot of these companies which have shown MTM losses in the previous quarters will be re-stating their numbers.

Now add the lower provisioning accounting rule for restructured loans that RBI relaxed for lenders over the weekend. Provisioning will now be on a 'fair value', which factors in future flows from the restructured loan. This reduces the provisioning burden significantly enabling banks to prop up the P/L. Corporates, hit by the downturn, too could take a breather.

And, that's just what the doctor ordered. A quick back-of-the-envelope 'conservative' calculation on 2,000 odd companies shows Rs 18,000 crore approximately expected to be written back to the reported profits for FY09. That's some 12% addition to FY09 profit numbers, based on the two relaxations. And the number is huge by any standards.

Goodwill impairment is the other thing that a few brokerages have started reporting on. But, it doesn't really matter. Yes, companies which show goodwill in their balance sheets will be affected on account of unfavourable environment. But, that's mostly to US companies. Goodwill impairment does not impact Indian companies. Financials of Indian companies do not get affected as Goodwill impairment is not compulsory as per Indian Accounting Standards. Yes, companies going in for restructuring or reporting as per US GAAP may have to alter some of the financials. But, on the whole, it's a non-event.

Having said that, the current Bear market rally is avoiding all negatives from the economy. The good numbers, as expected from the two relaxations, are book entries and do not reflect the true state that India Inc. is in. But, for the time being, no one cares about it. It will prop up EPS and make India Inc. look less expensive. Take it with a pinch of salt though. The smart ones will reduce valuation multiples of such companies. Next, perhaps the top line may shrink on a year-on-year basis, for the first time since the previous Bull Run which started Apr '03. The negative IIP numbers are an indication of this fact continuing up ahead too. Third, the CNBC TV18 Boston Analytics Consumer Confidence Index is at its all time low. Consumers are not buying and are postponing purchases. If the consumer doesn't spend, how do you expect India Inc. to make money? Lastly, the world economy is in crisis. And it's not going to come out of the crisis any time soon.

The conclusion is everyone is looking at the short term and riding the wave. After all, a 35% rally was a good trading opportunity to make money, if you got your call right. Will this rally take the Sensex to 12, 13, 14K? Non one knows. But, something's gotta give... ...very very soon.

Disclosure: The author is not permitted to trade and/or invest into the equity market directly or indirectly, apart from investing (long only) in mutual fund products. His equity exposure is only to the extent of ESOPs granted by the employer.