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Surreal Expectations

While markets seem to be betting on a better-than expected earnings season, the numbers tell a different story

Soumik Kar

While macroeconomic indicators tell a different story, what with the GDP growing at 5.7% in the June quarter — the economy’s slowest pace of growth in the past three years, and the CPI inflation in August rising to 3.36%, the markets seem to remain on solid ground. During the Q2 earnings season, by the looks of it, the market expects the earnings cycle to be more positive than negative. What else can be keeping them buoyant at this point, when macroeconomic indicators are far from rosy. 

In contrast to the market’s optimism, analysts and market experts remain concerned. “Barring domestic auto, commodity companies and private sector banks, growth is likely to be in mid-low single digits,” says Prateek Parekh, analyst at Edelweiss Securities. “The weakness is fairly broad-based and is a function of slackening demand as well as rise in input costs. By this time, earnings should have benefited from pent-up demand in the economy given that the effect of one-off disruptions, such GST-induced destocking and demonetisation, is ebbing. This lacklustre performance is a little disappointing,” adds Parekh. Consensus estimates peg the revenue growth for Nifty companies to be around 15% but a mutued earnings growth of just 5% as margins come under pressure in Q2FY18.    

Kamlesh Kotak, director (equity research), Asian Market Securities, says that there could be some downgrades owing to weak operating margins now that commodity prices have firmed up. This, combined with subdued demand, can put the end-user industries of commodities under pressure. For instance, “capital goods and engineering companies with a high exposure to commodities, such as ABB, Siemens, Cummins and sanitaryware players such as Kajaria Ceramics and Somany Ceramics, could see their margins come under pressure,” he says. 

However, most sectors that have done well in the recent past should carry on their positive performance in the coming quarter. The auto segment had a strong Q1 with 13% volume gr

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