At a time when the bears of the D-street seem to have taken a tight grip on the domestic market, the weak corporate earnings outlook is adding further pressure on investors
The recent downtrend witnessed by the Indian stock market has sent shivers across Dalal Street. While the larger FII (Foreign institutional investors) outflow had already made investor sentiment jittery, the recent subdued performance by Indian corporates is further adding to the pressure.
According to rating agency Crisil, India Inc's revenue growth for the July-September quarter is expected to slow down to 5-7 per cent. This figure marks the weakest pace of revenue growth in the last four years.
The agriculture sector was the hardest hit, as it experienced a revenue drop of around 20-22 per cent, largely owing to the declining raw material prices. Cement sector also saw a marginal decline in the same.
The analysis is based on 435 companies that make up nearly half of the total market capitalisation. It is worth noting that during the April-June quarter, these companies reported an 8.3 per cent growth.
“Revenue of industrial commodities, investment and construction-linked sectors—collectively accounting for 38 per cent of our sample set—grew only 1 per cent, weighing down overall performance," said Pushan Sharma, Director-Research, Crisil Market Intelligence and Analytic.
In the investment sector, the power segment also witnessed a marginal growth of just 1 per cent as above-normal monsoon reduced power demand. However, construction-linked sectors like steel experienced a revenue decline of 2-3 per cent. This was primarily due to the price drop led by cheap Chinese imports.
The recent comment by Bajaj Auto's management during the earnings call around muted festive season also made investors jittery. This had, in turn, impacted the trajectory of benchmark indices, sending markets in a declining mood.
While other factors like over-stretched valuations and volatility being caused by the upcoming US election results, are also adding to the current bearish sentiment in the domestic market, the recent data by the rating agency is likely to create a more dampening outlook.
So far in October, BSE Sensex has shed over 4,000 points, declining by nearly 5 per cent. NSE Nifty saw a similar path, and dropped by more than 5 per cent or 1,397 points. Despite DIIs (Domestic institutional investors) absorbing part of the FII flow and causing a bloodbath on the D-street, the larger trajectory of the market has been on a downtrend.
Earlier this week, global brokerage firm Goldman Sachs had 'tactically' downgraded Indian equities to 'Neutral' on slowing growth trends. It is worth noting that Jefferies and Bernstein Research also took a similar stance.
However, many analysts see this as a short-term trend, as some pockets of the market, undoubtedly, had overstretched valuations.
"Investors should prepare for a new normal where moderate growth will be seen in earnings. Things will start looking better in the coming quarters," Deepak Ramaraju, Senior Fund Manager, Shriram AMC, told Outlook Business.
However, euphoric bull runs seen in certain pockets in the past year won't be possible in the near term, he added.
While several factors are pushing markets in the red territory at the moment, certain aspects are signalling towards positive trends as well.
For instance, the Federal Bank's recent decision to cut interest rates is anticipated to boost IT earnings, as discretionary spending is likely to witness a surge. Even during the recent September quarter, Ebitda margins of IT companies expanded by 110-130 bps (basis points) owing to higher employee utilisation and lower attrition rates.
Telecom companies also witnessed a similar trend primarily due to lower license fees, spectrum charges and steady revenue growth.
Robust demand also led to growth in the pharmaceutical sector, which recorded a revenue growth of 11 per cent.
“Among the top 10 sectors, which account for 75 per cent of revenue, 8 saw Ebitda margin expansion, led by export-linked sectors such as IT services and pharmaceuticals, investment-linked sectors such as power, and consumer discretionary sectors such as automotive and telecom services," says Elizabeth Master, Associate Director-Research at the same firm.
While the current outlook for the Indian market appears somewhat mixed with a lot going on, the long-term view would be worth watching as many D-street players seem to bet on the same.