India Inc confident of profits, more than rest of world
Premium- Inflation expectations about non-staff costs of firms were lower in June than February
- Profit growth outlook of Indian firms in the coming year was one of the highest globally
Indian companies foresee inflationary pressures receding in the months ahead. The June India Business Outlook survey published by S&P Global showed that the net balance of companies expecting a rise in non-staff expenses (input costs) was only +11%. In February, a net balance of +25% of Indian private sector firms had predicted higher input costs, the highest reading in more than seven years. India’s June reading was the second-lowest figure out of the 12 nations for which comparable data was available, said the report of the survey that is conducted in February, June and October.
The net balance figure is calculated by deducting the percentage of survey respondents expecting a deterioration in a variable over the next 12 months from the percentage of survey respondents expecting an improvement.
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The survey points out that Indian companies are relatively more upbeat on profit growth expectations than their Asian and global peers (as the chart alongside shows). The net balance for this slid from +18% in February to +15% in June, but the overall level of sentiment was one of the highest globally.
The optimism on profit growth was unchanged among goods producers, but weakened at services firms, according to the report.
There is a reason for the latter’s muted confidence. Gaura Sengupta, India economist at IDFC First Bank, explains that the rise in core consumer price index inflation has been primarily led by goods inflation while service inflation has held steady. In simple terms, manufacturers have passed on input cost pressures more than the services sector. “This is because consumption expenditure on services (such as transportation and tourism) declined sharply during the pandemic and some part of it shifted towards goods inflation," she said.
Consumers could see a faster increase in the prices of services, but the pace of price hikes by manufacturers could moderate, if costs continue to soften.
S&P Global’s current report is based on responses from around 8,000 private companies in the manufacturing and services sectors. Interestingly, earnings growth expectations from Indian companies in the listed space are high.
An analysis by BOB Capital Markets Ltd showed that on a two-year compound annual growth rate basis, the profit growth expectations for Nifty50 companies at 15% is higher than companies in Malaysia, Singapore, and Korea, where profit is seen rising by 10-12%. BOB Capital has considered companies included in key benchmark indices in their respective countries such as the Nifty50 in India and the FTSE Strait Times index for Singapore.
“Historically, India has done better than many emerging markets in terms of earnings growth because of its better macros and a stable currency. These expectations are playing out this time as well," said Kumar Manish, president (research) at BOB Capital Markets.
Investors should note that elevated cost inflation has been a key dampener for investors’ sentiment, raising risks of earnings downgrades. Companies have increased prices to protect margins, but have not been able to fully pass on the burden of increased costs. “Now that inflation is showing some signs of easing, operating margins are expected to improve gradually," Manish said.
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Meanwhile, inflation trends will also have macro-economic repercussions, especially on monetary policy. Economists at HSBC Global Research reckon that even though commodity prices have eased recently, the inflation scare for India is not over. They expect the Reserve Bank of India (RBI) to continue to raise rates. Repo rate is now at 4.9%. HSBC believes the RBI should take the repo rate to 6% by December this year.
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