India Inc.’s earnings performance for the second quarter of the financial year has turned out to be largely in line with street expectations. Both revenue and profits, when compared to the results reported for the first quarter ending June, have shown signs of improvement that suggest a slow but steady pick-up in demand in the wider economy. This is comforting news for many who feared that the twin shocks of demonetisation and the hasty implementation of the GST would have significant medium to long-term effects on the economy. The quick rebound in the earnings of corporate India, however, should not come as too much of a surprise. Both demonetisation and the introduction of the GST, while definitely disruptive, are transitory in terms of their economic impact. It is also worth noting that most analysts had revised their earnings estimates downwards in the wake of the rapid policy changes. Such moderation in expectations too has probably played a part in making the earnings performance look better. However, the financials of many companies are yet to fully recover to match their performance prior to demonetisation. This is striking in sectors such as microfinance and housing finance, where companies have struggled to revive their loan book and disbursements growth rates, also in companies dependent on consumer demand. Many have clocked profit growth through cost-cutting rather than superior revenues.
Going forward, however, a return to largely normal earnings growth is more likely than not as the wider economy returns to normal under a more stable policy climate. None of this is to deny the expensive valuations at which Indian stocks are currently priced by jubilant investors. The market, which has been hitting new highs every passing week, has not cared much about the lack of sufficient earnings growth. It has been generous in offering sky-high prices to initial public offerings, and now trades at a historically expensive price to earnings ratio, calculated based on trailing earnings, of well over 24. The tightening of liquidity by major central banks like the U.S. Federal Reserve has not dampened its spirits either. Domestic mutual funds have been more than able to fill the gap left by foreign investors, thanks to a surge in retail investors putting in money through monthly plans. The Centre’s recent initiatives to ramp up spending in the economy by reviving credit growth and public infrastructure spending could yield some positive results, but will take time to materialise. Visibility on the time horizon for a full-blown and sustainable uptick in corporate earnings remains as hazy as the smog that is engulfing the capital where policy-makers are fire-fighting on GST. A swift and tactful unravelling of the GST tangles could, in fact, be the quickest fillip for reviving consumption and investment.
