Earnings are Plumetting. Why?
AS OF AUGUST 30 — Indian earnings for companies worth $600M or more dropped by 30%, with 40 of such companies reporting over 50% drop. This is largely a result of rising costs, as revenues have steadily climbed.
One contributor is rising input costs. SPGlobal published in June that Indian manufacturing companies were seeing their margins squeezed by rising input and freight costs, with little ability to pass this on to consumers. Their August survey revealed manufacturing companies reporting further increased cost burdens from building maintenance, food, labor, raw materials, and transportation costs. Indian industries face tight price competition with Chinese steel, which has been flooding markets in recent months.
Indian companies also struggle with unfavorable base effects, as earnings grew by over 30 percent across Indian companies last year.
BTW: Base effects describe when an increase of the same magnitude registers as a smaller percentage increase because the growth was off a larger base. For example, if an index grows from 100 to 150 in a single time period, the increase is 50 percent. In the next time period, if the index grows from 150 to 200, the magnitude of the increase is the same but the percentage increase is only 33 percent.
Still, August data showed that private sector output in India increased for the 37th consecutive month, with the growth rate still significantly strong compared to historical trends. Rate cuts, which are more likely now after Federal Reserve Chair Jerome Powell indicated they will cut rates as early as September, will provide relief to Indian companies that have been increasing their debt loads for critical projects.
Foreign investors are starting to turn away with flows reducing by $2B over the month. Although this is a small amount, the reduction in earnings has led to fundamental value being eroded away. Interestingly, some of the money is going towards IPOs with primary issuance inflow increasing by $1.4B. (Pricey stocks.) MSCI is rebalancing its Indian indices by adding 7 stocks and reducing restrictions on Adani stocks, which is expected to cause a $3 billion inflow.
