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Still In The Woods
India Inc’s Q2 scorecard will not read any different from the quarters gone by

The sentiment on the Street has seen a subtle change since September, what with the benchmark index recouping lost ground and the rupee bouncing back from its lows. But the overwhelming optimism may not last long once the second quarter results start trickling in. Though the growth numbers vary for brokerage houses, the consensus is that the effect of the slowdown will continue to get reflected in the numbers. Kotak Institutional Equities’ Sanjeev Prasad feels that the 30 companies that comprise the benchmark Sensex will collectively post an overall 4% year-on-year revenue growth and 18.5% growth, excluding the energy pack. The poor performance of Oil and Natural Gas Corporation, owing to poor revenue growth and lower operating margins, is expected to be a big drag on the overall growth of the Sensex pack.

Vivek Veda of Edelweiss Securities, which expects 12.7% revenue growth for the Sensex universe, believes that pharmaceuticals, information technology, financial and cement will save the blushes. “Mahindra & Mahindra, Tata Motors Bajaj, Hero MotoCorp, ONGC and Tata Steel are expected to post negative or minimal growth, indicating third consecutive quarter of tepid, sub-20% revenue growth [for the Sensex companies],” writes Veda in his report. In the December 2011 quarter, revenue growth was about 25% and over the next two quarters it stood at 18% and 17%, respectively.

Sensex earnings for the current fiscal have already been pared by 1% during the second quarter to Rs 1,260
In the case of Nifty 50 companies, Prabhudas Lilladher’s Ajay Bodke expects revenue growth to fall to a 10-quarter low of just 13.4% y-o-y. The previous time it had fallen lower than this was in Q3FY10 at 9.9%.

As far as operating margins are concerned, Edelweiss expects Ebitda to decline 239 bps y-o-y to 17.8% from 20.2% for Sensex companies with telecom, metals and real estate being major drags. “We believe, with cost rationalisation efforts undertaken by India Inc, margins are beginning to bottom out at 17-18%,” states Veda. On a quarter-on-quarter basis, margins have come off 38 bps from 18.2%. According to Bodke, moderation in input price inflation and strengthening of rupee leading to near-absence of foreign exchange losses will act as a cushion.

Against such a backdrop, the earnings downgrade that has continued since FY12 could well continue into the next quarter. Sensex earnings for the current fiscal were already pared by 1% during the second quarter to Rs 1,260. However, analysts believe the pace of downgrade seems to have slackened compared with the last year when consensus was looking at an FY13 EPS of Rs 1,451. “We believe the impact of INR’s appreciation and reforms initiated by the government should be visible on earnings of companies in the ensuing quarters,” states Edelweiss.

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