Sunday, June 7, 2009

Corporate results are mixed, not unidirectional

It is premature at this stage to declare that corporate results in general indicate bottoming out as the performance announcements so far have been mixed rather than unidirectional.

The performance of many sectors, including automobile components, construction equipment, real estate, airlines, hospitality, and textiles, continues to bear the brunt of a significant demand slowdown.

The financial results seem better than expectations for a few corporates as, possibly, the expectations themselves were low in the first place; moreover, for a few corporates exposed to foreign currency/derivative losses, accounting related forbearance (revised AS-11, which permits amortisation of losses rather than direct charge-offs) would also have contributed to alleviating profitability related pressures.

Having said this, it is reasonable to suggest that while the operating environment remains difficult, the intensity of stress we had witnessed particularly during the last quarter of 2008 has eased following the considerable improvement in systemic liquidity, thanks to various measures taken by the RBI.

However, access to cost-effective funding remains a challenge for most corporates, with most sources drying up-with the exception of domestic bank credit, which remains expensive. We believe domestic demand for both consumption and investments is likely to remain subdued in the near term, given the uncertain economic prospects and limited funding options.

Demand prospects for business dependent on international businesses continue to remain lacklustre and appear unlikely to witness a real turnaround at least in the next 18 months or so. Thus, given the moderate to weak demand conditions, it will be unreasonable to expect a turnaround in corporate profitability in the near term.

On the positive side, recent performance trends for a few sectors like automobile OEMs, FMCG, cement, and steel augur well for the future. However, the trend of increasing role of government, as has been seen even in some of the most market oriented economies, would suggest that the outcome of the elections will be an important factor for the prospects of Indian businesses.

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