Real corporate earnings recovery two years away: Ind-Ra

Corporates will take at least two more years to report accelerated earnings and reach the peak level achieved in 2011-12, India Ratings said. The ratings agency added that it is all the more crucial for enhanced public spending to drive growth till corporate earnings recover fully. If the government decides to go for fiscal loosening in the Budget, the BSE 500 companies can achieve 12-14 percent pre-tax profits, it said in a statement.

However, it was quick to add that fiscal loosening is not its base case expectation, and in such a scenario, earnings will dip to single-digits. "We expect EBITDA growth to be slightly ahead of nominal GDP growth in FY17. But a sustained improvement to the post-global financial crisis period (FY10-FY12) growth of 17-22 percent is unlikely till FY18-FY19," it added.

To achieve recovery in earnings, an improvement in nominal GDP in 2016-17 is required, it said. An improvement in corporate earnings to FY12 levels is unlikely due to low nominal GDP growth of 7.4 percent for the first half of the fiscal, it said. Interestingly, illustrating the importance of public spending, it said the growth in corporate earnings hinges on the fiscal deficit roadmap adopted by both the Centre and states.

A single-digit growth in deficit could result in earnings growth falling below 10 percent in FY17, it explained. It can be noted that recommendations of the Seventh Pay Commission, which can push up the fiscal deficit by 0.7 percent as spends on salaries increase, has led to intense speculation on the strategy to be adopted by the finance minister on fiscal consolidation. Many analysts are recommending a relaxation on the 3.5 percent fiscal deficit target for FY17 to support growth.