Q3 FY-12 earnings season; Will dark clouds go away??

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Q3 FY-12 earnings season; Will dark clouds go away??
Recession is not a state of mind, but of financial statements. After missing the targets in quarter ended September, companies are ready to roll out their December quarter numbers in January 2012, which would also set the tone of benchmark indices for the next year.

The companies, which set to disappoint the most would be those having significant debt on their books, as high interest costs would spoil the ground at large. While remaining blood would be sucked up by marked-to-market losses reported on foreign currency debt and derivatives due to the depreciation of the rupee.

Cash strapped airline companies are expected to continue with their loss-in, cash-out statements, owing to pressure injected by rising jet fuel prices on all the carriers.

Meanwhile, banking sector is again on the hospital door, with high interest rates, weak rupee, low investments, and NPAs as the major wounds on their bodies, and no doctor to be seen yet, referring to RBI.

FMCG companies and Auto companies are also way behind the world of cost efficiency, thanks to weak rupee. During the quarter, many automobile companies have replaced their foreign imports to domestic production, so as to reduce the costs, but sales numbers were not impressive too.

Meanwhile, rupee depreciation will not hurt all of corporate India. Companies depending mostly on export earnings such as IT exporters, bulk drug exporters, pharmaceutical companies that focus on formulations exports, and oil exploration companies with low proportion of debt on their balance sheets, could gain from weak rupee as their profitability will improve.

But the gains are partly expected to be offset with the varying exposure of exporters to the Indian currency fluctuations.

According to a Crisil report, Indian companies are likely to report a 2 percentage point drop in operating profit margins in the third quarter of current financial year. Also the report stated that net profits would remain under hefty pressure owing to forex and capital losses, that might hurt the revenue growth too.

Meanwhile, the lackluster corporate performance would also be reflected in the benchmark indices- the Sensex and Nifty. Both the indices have lost over 22 per cent in 2011, and further if, earning season fails to come up to the expectations, the dark clouds are expected to stay on the markets too.

Dion Global Solutions Ltd

Read more about: recession, currency
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