India Inc may maintain steady earnings growth, but crude oil may be a headwind

The Indian market has moved in tandem with its global counterparts since the onset of the pandemic, both in a sharp decline and then in a strong recovery. But halfway through the race he broke away from the pack and started to pass his front row peers. The general comment then was that the Indian market is well beyond fundamentals and there is no justification for the rally.

Corporate earnings reports since the start of the pandemic have pleasantly surprised all market enthusiasts.

For six consecutive quarters, India Inc has recorded double-digit growth. For the December 2021 quarter, the cumulative net profits of more than 3,000 companies that reported their results increased by 26.9% on an annual basis (YoY) and net sales by 24%.

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However, growth has not been uniform across all sectors. As has been the trend in recent quarters, the financials, metals, and oil & gas sectors outperformed the others. These sectors accounted for 60% of the total profit of all companies compared to 45% in the pre-pandemic era.

While revenue growth was visible across all sectors, manufacturing was impacted by rising input costs. With demand still returning to normal during pandemic-induced shutdowns in many states, businesses had to absorb the high cost they could not pass on.

Indian exports continue to contribute significantly, with engineering products, petroleum products, gemstones and jewellery, organic and inorganic chemicals, and medicines and pharmaceuticals being the main categories.

With the market reaction to the Russia-Ukraine crisis and the possibility of quantitative easing and interest rate hikes, what will future numbers look like? Just as the rally predicted improving numbers, the recent correction tells us that business growth is slowing.
There are signs of a slowdown in economic activity, as evidenced by the Industrial Production Index (IPI), which fell to 0.4% in December 2021, the lowest in 10 months. Manufacturing, which accounts for more than three-quarters of the IIP, fell 0.1% year-on-year, the first contraction since February 2021.
While the manufacturing sector may have paused, the service sector continues to have a positive outlook. Comments from most banks reflect the positive outlook for the near future. The budget provided the necessary impetus by increasing government spending, which can stimulate credit growth and improve manufacturing activity.

The IT sector continues to be the bright spot and is expected to grow to $350 billion by 2026 from the current level of $227 billion, adding another $30 billion in revenue to bring the overall growth rate to 15, 5% – the fastest in 11 years, according to Nascom. The industry believes FY23 will also mean rapid growth.

Overall, there are no signs of a significant decline in corporate earnings that can be expected in the last quarter of the current fiscal year, but there is also little likelihood of positive surprises. .

The biggest headwind for corporate earnings and the economy is the price of oil. Supply issues should keep the rate high.

Higher energy prices can worsen inflation and impact interest rates and consumption not only in India but also around the world. Certain sectors will thrive in this environment.

Are we in a situation where the fundamentals are ahead of the market after the recent drop? Not really, the market has been doing well and is well above average valuation. It still priced in strong earnings growth, which may not be the case in the current environment of high oil prices and rising bond yields.

The rise in inflation and the rise in key interest rates could act as a brake.

Although the market is down more than 10% from its peak in mid-October 2021, we are still not in the comfort zone. The fear of the unknown is still strong.

–Vijay Singhania is President of TradeSmart. The opinions expressed in this article are his own.

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