Corporate earnings to remain muted next fiscal too: Report

MUMBAI: Corporate sector earnings growth would continue to be muted in FY16 and the proposed increase in government expenditure is the only silver lining which could help marginally, according to India Ratings.

"We expect corporate earnings to continue their muted growth trend in FY16. However, the downward trajectory may get checked to an extent, thanks to the proposed government spending," the domestic ratings agency said in a note today.

"There is no immediate economic trigger in the Budget proposals which will cause a turnaround of stressed or vulnerable corporates," it said.

A larger fiscal deficit is accompanied by greater profits, and vice versa, it said, adding that this is arrived at using economist Michael Kalecki's profit equation.

The higher capital spending proposed by the Budget may boost aggregate corporate earnings with a lag of three to six months, it said, clarifying that other key drivers like investment, household consumption and corporate dividend or spending are unlikely to boost corporate earnings.

Factors which would moderate corporate earnings in FY16 are the disinflationary trend of moderating nominal GDP, reduction of accruals, and in some cases, even reversal of accruals by corporates as well as a marginal uptick in taxes in FY16, it said.

The report said corporate earnings have not improved in FY15 as well, wherein earnings of Sensex companies have fallen by eight per cent.

A third of the 500 largest companies by their borrowing do not have enough margins to support even its interest payment, it said.

Additionally, the window of restructuring of loans going off from April could persuade banks to take a decisive call on weak corporates that need to be restructured, it said, adding there would be a "significant spike" in the number of NPAs and restructured assets in the last quarter of the fiscal.