India's slowing profits growth offers wake-up call for record-high shares

Mumbai: Indian corporate earnings are growing at the weakest pace in nearly six years, in a more sober reflection of the economy than a stock market hovering near record highs since the May election of pro-business Prime Minister, Narendra Modi.

The new premier, previously known for economy-stimulating infrastructure projects on a state level, has been widely touted as the man to revive an economy lumbering through the longest spell of below-5 percent growth in a quarter of a century. Such is investor sentiment surrounding Modi's premiership that the Nifty has risen by a third this year, touching a lifetime high on Wednesday.

But weakening corporate earnings growth highlight the continued need of Asia's third-largest economy for increased investment, lower interest rates and a slower rate of inflation, company executives said. "We did assume at the beginning of the year that domestic conditions would improve post elections," said R. Shankar Raman, chief financial officer of conglomerate Larsen & Toubro Ltd.

"It has, sentiment has improved, but the ground reality is still to change. I do think it will take a good six months for it (to) completely kick in. Hence, I want to be circumspect." The median net profit growth of 102 Indian companies which have reported July-September earnings was 7.7 per cent, the lowest since October-December 2008, according to Thomson Reuters StarMine data on companies tracked by at least one brokerage.

Median revenue growth at those companies - including cement maker ACC Ltd, financial services provider IDFC Ltd and mobile phone network operator Bharti Airtel Ltd - was 10.5 per cent, the lowest in nearly five years. Revenue growth is likely to slow even more in October-December to 10 percent, but will pick up to 12.5 per cent in January-March in line with a general expectation for quicker economic growth and a reduction in central bank interest rates.

Even so, the country's biggest carmaker, Maruti Suzuki India Ltd last month said its auto sales growth would slow in the second half of the fiscal year ending March 31, cooling hope of an industry rebound after two years of declining sales. "The situation of course is not as bright as many people hoped it would be at this point. We do not expect the growth in sales of Maruti will be as high a percentage (as) in the first half and this will slow down," said its chairman, R.C. Bhargava.

The downbeat outlook puts pressure on Modi to deliver on election promises to take "decisive action" to facilitate investment in power generation, roads and rail, to stimulate economic growth. "We need some fundamental changes on the ground," said the CFO of a large Indian conglomerate who declined to be identified when expressing views on the government. "Up to now, there are many statements of intent, but there is no real investment."