>INDIA STRATEGY: 2QFY12 Preview: Weak earnings; Downgrades continue

■ Different quarter same story; Results expected to be weak

The Sensex companies are expected to mirror the previous quarter with weak headline profit growth of 10.8% on a consolidated basis and 14.6% on a standalone basis. This is the weakest forecast in the last 8 quarters. Second, even the sales growth at 16.9% is expected to be the slowest in the last 8 quarters. Third, margins on an aggregate basis are expected to continue

declining. Lastly, we continue to expect downgrades to our Sensex EPS from 1140 currently to 1100-20 levels. We see bigger risk to FY13 estimates of Rs1340 (our expectation is Rs1250).

■ Margin pressure continues; Energy, IT & Autos worst hit

Aggregate Sensex EBITDA margins are expected to show a drop of 90bp. This is largely led by Energy (-210bp YoY), Software (-200bp YoY) & Auto (-130bp YoY). While input cost pressures are likely to ease off, we think slowing topline growth will continue to drag earnings growth.

■ Energy, Pvt banks lead growth; Autos, Telecom & Tisco drag

Among Sensex cos, Energy (RIL), Pvt. Banks (ICICI & HDFC Bk), Sterlite & ITC are expected to be key contributors of growth. On the other hand Autos (Maruti, Tata Motors), Telecom (Bharti) & TISCO are expected to drag down growth.

■ Rupee depreciation could cause earnings volatility

The depreciation of the rupee will likely cause volatility in earnings. On the positive side, rupee EPS for IT companies (Infosys) should be upgraded. On the negative side companies like Ranbaxy, Power Finance, Sintex are likely to report losses on forex borrowings (most companies don’t route this through the P&L).R

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