Demand is slowing down in various industries, says Rakesh Arora, associate director & head of research, Macquarie India . In an interview with fe?s Devangi G, he expects earnings downgrade to continue in FY12 given that higher costs would start impacting margins from as early as next quarter. He expects Sensex EPS to grow at 15% instead of 19% as expected by the market, the difference largely being a result of expected margin compression.

How are Q4 corporate earnings panning out?

We expect strong revenue growth and flat margins in Q4. Costs have risen significantly and we think there would be a lag effect of the rising cost on margins. We see more margin pressures in the next quarter and most of the Q4 results so far are playing out to this effect.

Are there any visible signs of a slow-down in demand, in terms of inventory pile-ups?

What we have gathered so far is that steel demand is slowing as a result of which steel prices corrected in April. Demand numbers for cement companies too are likely to post a decline in April. Even in case of automakers, as mentioned by Maruti in their recent results commentary, the footfalls are not resulting into higher sales.

Which are the sectors that will drive the earnings growth for March quarter ?

We are bullish on IT, materials and pharma sectors and have overweight positions. In case of banks, since expectations were built for a considerable compression in net interest margins, slightly lower compressions ( except in case of Axis Bank) has come across as a surprise. We believe consumer goods and consumer staples sectors like Automobile and FMCG sector may surprise on the lower side. On the infrastructure side more than the numbers the surprise may come in the form of lower order books.

Do you expect further earnings downgrade for Sensex in FY12?

For FY12, the consensus estimate stands at 19% EPS growth for Sensex of which about 12% would come from revenue growth and rest from margin expansion. We believe there is a risk to the expectations of margin expansion and see the FY12 EPS growth for Sensex at 15% instead. Rising interest rates have pushed interest cost while rising raw material prices have added to the working capital requirements. Hence we expect the FY12 EPS downgrades to sustain as analysts built in these high cost numbers.

Which sectors are likely to feel the pain of higher inflation and sustained rise in commodity prices in the next quarter? Will a normal monsoon help support markets?

The first impact will come from higher coal prices which were recently increased in March. Most of the non-core sectors like Cement, Aluminium and Steel would start showing negative impact of higher coal prices from next quarter. Further, a hike in diesel prices towards end of May, could generate an across the board cost pressure and especially on commodity companies. Also, as we enter monsoon season which is a relatively lean season for demand, the next quarter may be quite challenging for corporate India. Sectors like cement which have a huge oversupply, may feel a pressure of volume compression as demand slow-down sets in.