Good to follow bad

The last financial year provided nothing to talk about for companies. While no dramatic uptick is expected in the first quarter of the new financial year, some analysts believe earnings should start improving from the second quarter and that FY14, overall, will be much better than FY13. Much of this hope is driven by an expected fall in inflation and further easing by the central bank. Among the believers is Abhay Laijawala, director, research, Deutsche Equities India. He thinks the low earnings cycle will bottom out and an upswing will kick in from the second quarter of FY14. He says, “We expect GDP to grow at 6.5% for FY14 from the 5% projected this year and believe interest rates will be pared by 100 basis points.” 

That said, the biggest bugbear that the government has to deal with is the current account deficit. What are the chances of it playing spoilsport via a depreciating rupee. Though a weak rupee certainly benefits software and export oriented companies, it means expensive crude and increased input costs for companies that are import dependent. 

Laijawala believes it should not be a problem. “The worst should be over as far as the current account deficit is concerned, as will be reflected in the December export numbers. Gold prices too could taper off due to the government’s efforts to restrict gold imports. All this will have an impact from Q2 onwards,” he adds. 

If this sunny scenario works out, companies could certainly gain from a revival in investment and consumer spending. Companies operating in the cement, auto and capital goods have taken it on the chin and could be the first to benefit. The ailing infrastructure sector will also experience relief on the back of lower interest rates and much needed government action. Investors in state-owned oil marketing companies, too, will gain as the effects of subsidy reduction starts kicking in. Subject to global stability, information technology companies will also roll in the goodies.

A word of caution, however, comes from Rajat Rajgarhia, director, research, Motilal Oswal. He maintains that the pace of economic recovery and commodity prices may dampen earnings. “Reforms notwithstanding, the ‘recovery’ is proceeding at a snail’s pace. Secondly, commodity prices, specially crude oil and coal, still pose downside risks. With an election coming up, how political parties form coalition alliances will determine future policy action.” Despite that dire reminder, corporate India has its fingers crossed and eagerly awaits a turn of tide.