After recovering more than 6% from its 2011 lows, the market seems poised for a trigger to breach key resistance levels, which are 16,500 for the Sensex and 4,850 for the Nifty. However, the results season may not allow the market to hold on to its gains given that analysts are forecasting another quarter of muted topline growth and margin compression.
On the back of persistent headwinds of high inflation, high interest rates and the depreciating R for a second consecutive quarter, analysts are not only expecting another tough quarter for India Inc but also are seeing chances of further downgrades of the earnings outlook for both the current year and 2012-2013.
Bank of America Merrill Lynch expects this result season to be a ?Deja Vu? with weak headline profit growth and a further decline in the Ebitda margins of the Sensex companies. Also, like the previous two quarters, it expects sectors like IT, banks and consumer staples to be the key contributors to the earnings growth while metals, autos, energy, telecom and real estate to pose weaker numbers.
Operating margins are expected to decline owing to the cost pressure arising from the depreciation of the R which is expected to erode any gains originating from softening of commodity prices. Both Edelweiss and Motilal Oswal have forecasted a contraction of 249 and 240 basis points respectively in the Ebitda margins for the quarter compared to last year. Edelweiss sees this declines to be most prominent for the capital goods, auto and metal space.
The R has depreciated by 8.5% between October and December while the average value of R has gone down by nearly 14% in the quarter compared to last year. Consequently, analysts are expecting IT and Pharma companies to benefit from this depreciation. For IT companies softness in revenues due to a seasonally weak quarter and any decline in IT spending following the slow-down in the global economy, is expected to be offset by the positive impact of rupee depreciation on margins. Infosys is expected to lead the net profit growth amongst the top IT companies led by its hedging strategy.
The banking space is expected to reflect an impact of slower credit growth while NPAs ( Non performing Assets) could further increase due to the SME portfolios. Analysts are however pricing in stable to weak NIM ( Net Interest margins) across the sector. However, private sector banks like HDFC, and ICICI are seen sustaining their contribution to the Sensex earnings growth.
Besides a general contraction in the margins, analysts are also expecting a rise in the number of companies which post a decline in earnings. Edelweiss expects 30% of the companies from its coverage universe to post 20% or more decline in profits. Motilal Oswal on the other hand, sees 51 out of 136 companies under its coverage (or 38%) to witness ?de-growth? or decline in their PAT (Profit after tax) numbers in December quarter, compared to last year. The broker is expecting the lowest PAT growth for its sample universe in the last 23 quarters excluding global financial crisis of 2008 when for four consecutive quarters, net profit growth remained negative.