Corporate India pins hope on the domestic economy to keep up the momentum in earnings revival despite a looming global slowdown.
Most corporates focused on the domestic market pointed to robust demand outlook, thanks to complete reopening from the pandemic blues, higher government spending on infrastructure, an overall good monsoons, the upbeat mood for the festive season, higher industrial utilisation, order backlogs, and continued formalisation of the economy, brokerage firm Emkay Global said in a note.
“With normal monsoon forecast, we expect better demand and softer raw material prices towards the latter half of the year, which would help in better the topline momentum as well as margin,” Manish Dawar, executive director and chief financial officer at Devyani International, said.
The outlook on demand has been boosted by the acceleration in monsoon rains in July and August, driving the country’s overall rainfall from a deficit of 18 percent at the end of June to a surplus of 8 percent.
A normal monsoon is considered important for India’s rural economy that is heavily reliant on seasonal rains for agricultural produce and for keeping a lid on food inflation, which accounts for nearly half of the widely tracked Consumer Price Index.
Mawar’s sentiment on demand conditions going ahead was echoed by fast-moving consumer goods major Dabur India. Mohit Malhotra, chief executive officer at Dabur India, said that normal monsoon, increased minimum selling price for major crops, and the government’s rural focus should result in a “resilient recovery” in rural economy.
Over the last year, demand trends in India have diverged as high inflation and unseasonal rains resulted in a compression in rural demand, while reopening of urban areas led to a resurgence in urban discretionary demand.
“Demand compression also what is being observed in the rural India and impact of inflation is much higher in rural as compared to urban, and therefore, volumes are also getting compressed,” Malhotra said in a post-earnings conference call recently summarising the trend in the June quarter.
On the global front, a deepening energy crisis in Europe, slowdown in the US and government intervention in some export-oriented sectors have exacerbated concerns over external demand among investors.
While odds of a recession in the US have fallen dramatically in last two weeks, the sharp inversion in the US yield curve, a successful predictor of past recessions, has kept investors on the edge.
IT companies appeared cagey in their commentary on demand conditions beyond 2022 given that most economists now expect the US economy to tip into a recession in 2023 because of aggressive interest rate hikes undertaken by the Federal Reserve.
Tata Consultancy Services Chief Executive Rajesh Gopinathan said that the company was being very vigilant in terms of demand conditions abroad even though there was nothing to suggest that demand was slowing down on an immediate basis.
In the US, technology companies have been dragging their feet on hiring and, in some cases, laying off staff after a brutal stock market correction resulted in a funding winter for startups around the world.
Overall, consensus estimates by analysts available on Bloomberg show that aggregate net profit of BSE500 companies is expected to grow merely 11 percent on an annualized basis over the next two years.
“With prices of commodities peaking and easing inflation, there may be some respite for the companies. However, global macro headwinds, interest rate hikes and overall demand slowdown may continue to keep the margins in check,” said IIFL Securities analysts led by GV Giri.
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