'Q2 profit nos muted; investment cycle revival in 2-4 qtrs'

Contrary to expectations, India Inc's second quarter numbers failed to cheer the market much. Despite the market scaling new highs almost everyday, a Kotak Institutional Equities report says net profit of the BSE-30 Index grew 6 percent year-on-year, well below expectation of 10.1 percent growth; while EBITDA grew 1.8 percent, 3.8 percent lower than expectation.

The muted net profit growth in Q2 against the previous quarter (19.3 percent) has the potential to temper the Street’s expectations of accelerated earnings.

Kotak, however, is positive on India in the medium term on the back of ongoing economic reforms and improved macro-economic situation. But it has marginally lowered its earnings estimate post the 2QFY15 results season. It expects FY2015 net profits of the BSE-30 Index to grow 10.7 percent versus 13.8 percent previously, and moderate upside from higher treasury income for banks from softer G-Sec yields.

Additionally, it says a full-fledged economic recovery may require another 2-4 quarters as underlying trends in banks (high NPLs and slippages) and consumer staples (low volume growth) remained weak but order inflows picked up. Though the government is implementing reforms for higher growth, important growth parameters such as loan growth, volume growth for consumer and cement companies and loan growth continues to remain weak.

A Business Standard report also suggests that India Inc is facing a tough time boosting sales growth. For the quarter ended September 30, 2,432 companies’ (excluding banking & financial and oil and gas ones) net profit (adjusted for exceptional items) rose 41.8 percent Y-o-Y, and 29.8 percent growth reported in the previous quarter, but net annual sales growth slumped to 5.9 percent, against 10.1 percent Q-o-Q.

Kotak also expects weak GDP data in the second half of FY15 given the continued weak investment demand and likely reduction in plan expenditure (to offset weak taxation revenues) by the government in order to meet its fiscal deficit target of 4.1 percent.

There is, however, a silver lining in all this – order inflows of industrial companies picked up sharply, indicating a potential recovery in the investment cycle in 2-4 quarters, the report adds. Also, the correction in global energy prices (crude) should result in lower current account deficit, fiscal deficit and inflation, giving Reserve Bank the room to soften its stance on monetary policy and cut policy rates in the first quarter of calendar year 2015 or the second quarter.

One of the things that can give a fillip to India’s GDP and revive investment cycle is economic reforms. While the government has already announced a slew of reforms, many more are expected in the next 12 months, namely taxation reforms (GST in particular), participation of private sector companies in commercial mining of coal, among others.

Posted By: Devika Ghosh