Q2 Performance for 2017-18

Why in news?

What is the status of the economy?

India Inc.’s earnings performance for the second quarter of the financial year has turned out to be largely in line with expectations.
Both revenue and profits have shown signs of improvement that suggest a slow but steady pick-up in demand.
This is comforting news, considering the twin shocks of demonetisation and the hasty implementation of the GST.
While, both demonetisation and GST are definitely disruptive, they are transitory in terms of their economic impact.
It was feared that these would have significant medium to long-term effects on the economy.
Notably, most analysts had already revised their earnings estimates downwards to accommodate for business losses due to uncertainity in policy.

What are the observed negatives?

Financials of many companies are yet to fully recover to match their performance prior to demonetisation.
This is striking in sectors such as microfinance and housing finance, where companies have struggled to revive their loan book.
Companies dependent on consumer demand have clearly taken a hit.
Many have clocked profit growth through cost-cutting rather than superior revenues.
However, a return to largely normal earnings growth is more likely going ahead, as the economy returns to a more stable policy climate.

How has the ‘Financial Markets’ responded?

The market has been hitting new highs every passing week.
Despite the shares are indeed expensively priced, financial markets don’t seem worried about the lack of sufficient earnings growth.
Inital Public Offering – IPOs are opening to sky-high offeres, and are trading at a historically expensive ‘price to earnings ratio’.
The tightening of liquidity by major central banks like the U.S. Federal Reserve has not dampened its spirits either.
Domestic mutual funds have effectively fill the gap left by pullout of foreign capital.
This has largely been due to a surge in retail investors putting in money through monthly plans.

What is the way forward?

Ramping up spending in the economy by reviving credit growth and ‘government spending’ is already being done.
These could yield some positive results but will take time.
A full sustainable uptick in corporate earnings remains hazy.
A swift and tactful sorting out of the ‘GST tangles’ could help in for reviving consumption and investment to an extant.

Source: The Hindu