India’s Results Season: Modi Effect Yet To Kick In

Source: blogs. ft.com

On Friday Indian companies will begin posting their results for the quarter ended in September – the first full three-month period under the country’s new, pro-business government.

The latest macroeconomic indicators suggest the economy has picked up following this year’s general election, growing at 5.7 per cent in the three months to June. But if analyst forecasts are anything to go by, only some sectors have received a boost from renewed optimism in India.

Analysts at Mumbai-based Ambit Capital expect highly cyclical sectors such as IT services and automobiles to show strong growth. But improvement will be more gradual in areas such as banking and capital goods, where structural problems remain.

Infosys, the Indian IT bellwether, will be the first major Indian group to report its results on Friday.image12

Ankita Somani of MSFL Research expects revenue growth at the top four companies in India’s vast IT services sector – Infosys, Tata Consultancy Services, HCL Tech and Wipro – of about 4.8 per cent quarter-on-quarter, up from 3.5 per cent in the three months to March.

This isn’t, however, a sign of improvement in the Indian economy under the new government. Rather, it reflects a recovery in the US and Europe, the sector’s key markets. What’s more, client spending always grows in the second quarter, while visa costs and wage hikes won’t weigh on margins as they did earlier in the year.

One industry that has benefitted from the new optimism in India is the automotive sector, where car sales have returned to growth after two years of contraction.

Tata Motors has been relying on its luxury Jaguar Land Rover unit to prop up its financial figures. But this quarter Deepesh Rathore of consultancy Emerging Markets Automotive Advisors sees the domestic business improving, as sales of commercial vehicles rise – a sign that industrial activity is picking up in India.

Analysts at Ambit Capital expect Tata Motors’ profit after tax to rise to Rs43.3bn ($710m) in the quarter, up from Rs38.3bn in the same period last year, on sales of Rs636.7bn, up from Rs568.8bn a year ago.

Here too, however, the news is not all good. Consumers are buying cars again but they are still being careful with their money. “We have seen a decent uptake for some of the car companies but if I look at the listed companies only Maruti is doing well,” Rathore says. Maruti – India’s largest carmaker by sales – is seen as a reliable brand, he says, and has offered deep discounts.

The story is very different in the banking and capital goods sectors, where analysts are more cautious in their forecasts as structural problems remain.

“Banks loan growth has hardly improved so that again remains one of the ‘misses’… even after the new government has come into power,” says Gaurav Mehta, an analyst at Ambit Capital. “Banks should ideally improve in an improving economy.”

Ambit expects banks to see little balance sheet growth in the quarter just gone and notes that asset quality remains stressed. Ambit expects a 27 per cent year-on-year increase in consolidated net profits for the banks that it covers, but that is only thanks to a weak set of figure in the same quarter last year.

In fact, the poor health of India’s banking system – with credit growth remaining slow and investment limited – is one reason why Ambit expects India’s economy to grow 6 per cent in the next financial year, compared with a consensus of about 6.5 per cent.

Analysts at Kotak Securities are watching the capital goods and construction sectors to see what senior management say when they post their results. Business confidence has improved in India and the government has made a start on reforms but this has yet to trickle down to new projects and orders. It will take between 6 months and two years for investment to pick up, according to the brokerage.

Softening metal prices are expected to help margins in the capital goods, engineering and power sector, where Kotak Securities predicts a 6 per cent year-on-year increase in revenues in the quarter ended in September.

Debt levels and high interest rates mean the news is worse for the construction sector, which generally lags economic recovery. Here, Kotak forecasts a hefty 72 per cent year-on-year decline in aggregate net profits of the companies it covers.

So far, the big success of Narendra Modi’s government has hinged on rising confidence that has boosted stock markets – good both for the government’s disinvestment plans and for companies looking to raise funds.

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