India Inc's poor Q1 results signals economy slowing

Mumbai: The lower than expected quarterly results reported by India Inc during the quarter ended June 2017 has set the tone for a weak earning season going forward. Market experts pointed out that the weak growth in corporate earnings across sectors points to a broader slowdown and the trend is expected to continue for another few quarters. 

According to analysts at Kotak Securities, Q1FY18 net profit of the Nifty-50 index declined 8.4 per cent as compared to the same period last year, 1.8 per cent lower versus expectation. Several sectors including automobiles, energy, pharmaceuticals, real estate and telecom reported a y-o-y decline in net profits. However, strong performance of banking, metals and mining sectors due to the low base in Q1FY17 helped stem the decline in net profits. 

“We now expect FY2018 net profits of the Nifty-50 Index to grow 1.5 per cent, following the earnings downgrades in several sectors such as banks, metals, mining and pharmaceuticals through the Q1FY18 results season. We do not rule out further downgrades if the economy fails to recover quickly from the temporary disruption arising from demonetisation and implementation of GST.

The government expenditure can support GDP growth up to a point. We do not rule out an extended slowdown in consumption, hiring and investment in the informal economy if it is unable to cope with the changes arising from GST and resultant formalisation of the economy,” said analysts at Kotak Institutional Equities adding that corporate earnings growth will hold the key to future market performance given the limited scope for re-rating in most parts of the market.   

In its India equity strategy report, Bank of America Merrill Lynch (BoAML) argued that there is little hope for capex recovery in the near term, as there seems to be little room for the government spending to surprise on the upside. Corporate capital expenditure, which accounts for 57 per cent of the gross fixed capital formation is unlikely to recover in the near term given poor industrial utilisations. “This creates a muted outlook for capex related stocks and for corporate lending,” it said.