Bad news from earnings' season

India Inc. Profit, Growth Continues to Slip
Morgan Stanley has pointed out in its India Strategy report that Corporate India’s growth and profits continue to be south bound reflecting the Indian Economy scenario amid global financial crisis.

Here are our key takeaways from the recently concluded September 2008 quarterly earnings season:

• Corporate India (represented by a MS sample of 105 companies) reported a 29% fall in net earnings for the quarter ended September 2008 – an alltime low. This compares with a trailing five-year quarterly average growth of 28%.
• Excluding the Energy sector, growth was 11% YoY – a five-year low compared with a trailing five-year quarterly average growth rate of 30%.
• Our coverage universe surprised negatively versus MS analysts’ expectations. MS analysts’ were expecting net profit growth of 3% for our coverage universe (12% ex-energy).
• Given that F2009 earnings were revised down for nine out of 10 sectors and for market aggregates at the end of the season, it could be said that the quarterly earnings disappointed consensus. Downward revisions outstripped upward revisions 2:1 at the end of the season versus where earnings were at the start of the season.
• The Sensex constituents grew earnings 5.5% YoY on an aggregate basis, behind MS analysts’ forecasts and its worst performance since June 2002.
• Broad market earnings (sample of 1,038 companies) continued to show weak performance with earnings falling 7% YoY.
• Notably, four out of the 10 sectors reported 20%-plus growth in profits.
• At the sector level, the best performances came from Utilities and Technology. The laggards versus the aggregate numbers were Consumer Discretionary, Energy, and Healthcare. Save for Technology and Financials, all sectors reported a slippage in operating margins YoY.
• Versus MS expectations, the biggest positive surprises came in Consumer Discretionary and Financials while the negative surprises came in Energy and Healthcare.
• Excluding the volatile Energy sector, revenue for our sample rose 26% YoY – a seven-quarter high and a strong performance considering the macro environment, explained in part by high inflation.
• EBITDA margins fell 720bp YoY and 122bp YoY excluding the Energy sector. This took EBITDA growth to a two-year low of 26.6% for the sample Ex-energy and to a 5½ year low of 14.6% for the aggregate sample.
• The key problem for net profit growth was the declining share of net financial income in pretax earnings and the rising depreciation expense. Other income fell YoY whereas interest costs rose at their fastest pace in history.