In India corporate profitability is measured as an index of the country’s well-being. However, deciding economic stand point on just corporate profitability cannot hold true specifically in the case of India where diverse factors influence economic direction. Being a commodity-starved economy, India is clearly set to gain from the commodity price correction.
Also a steep downward bias in interest rates will be favourable for the economy and specifically the individual consumer. However, the same will not necessarily translate into corporate profitability and could rather cause drop in profits.
The trend on corporate profitability will act differently for the large cap space and the small and mid-cap companies. The biggest user of bank debt, after government, is the small and mid segment companies, which will gain from the low interest rate scenario. However, higher commodity prices means higher profit for sensex companies, therefore, posing a contradictory scenario.
The large cap segment is spread across many sectors, one of the largest being commodities. During the high commodity prices seen in the first half of FY 2008-09, this segment witnessed a peak in earnings. The second decisive segment in the large cap space is the banking space which in spite of many issues made significant bond gains due to a drop in yields.
However, at current levels of yields, bond gain from here on is expected to be relatively muted for most in this segment. For large companies, with the exception of select oil & gas companies that what are set to gain from new production in the next two fiscals, it appears that profits are at a structural high for the 2009 fiscal.
A drop in commodity prices will clearly benefit the consumer and the small and mid-size businesses. However, the same is not being captured adequately in aggregate profits and reflecting on corporate profitability. The aggregate numbers will be dwarfed by large companies whose profit could decline cyclically.
Clearly thus, a market call on corporate profitability alone is not prudent. Hence, if oil prices stay low the corporate profit aggregates may not be a good indicator of the economy for 2009-2010. A reliable indicator would be profitability analysis of the mid-cap segment.
Also a steep downward bias in interest rates will be favourable for the economy and specifically the individual consumer. However, the same will not necessarily translate into corporate profitability and could rather cause drop in profits.
The trend on corporate profitability will act differently for the large cap space and the small and mid-cap companies. The biggest user of bank debt, after government, is the small and mid segment companies, which will gain from the low interest rate scenario. However, higher commodity prices means higher profit for sensex companies, therefore, posing a contradictory scenario.
The large cap segment is spread across many sectors, one of the largest being commodities. During the high commodity prices seen in the first half of FY 2008-09, this segment witnessed a peak in earnings. The second decisive segment in the large cap space is the banking space which in spite of many issues made significant bond gains due to a drop in yields.
However, at current levels of yields, bond gain from here on is expected to be relatively muted for most in this segment. For large companies, with the exception of select oil & gas companies that what are set to gain from new production in the next two fiscals, it appears that profits are at a structural high for the 2009 fiscal.
A drop in commodity prices will clearly benefit the consumer and the small and mid-size businesses. However, the same is not being captured adequately in aggregate profits and reflecting on corporate profitability. The aggregate numbers will be dwarfed by large companies whose profit could decline cyclically.
Clearly thus, a market call on corporate profitability alone is not prudent. Hence, if oil prices stay low the corporate profit aggregates may not be a good indicator of the economy for 2009-2010. A reliable indicator would be profitability analysis of the mid-cap segment.
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