2nd Quarter earnings may show muted bottomlines

The earning season has started off with a bang but it may end with a whimper! Equity markets have cheered the better than expected results of Infosys and the in line results of RIL, but it may just be the tip of the iceberg. A detailed analysis of Infosys results throws up some interesting facts. A major portion of the incremental profits have been attributed to the depreciation of the rupee, a situation which may not last long. In case of RIL the GRMs are on a decline on QOQ basis and the company is sitting on a pile of cash which it is unable to deploy due to the economic slowdown. The result season as it unfolds will have more surprises on the downside rather than upside.

Rising interest rates are likely to give a severe hit to the bottom lines (Profits) of majority of the companies despite a steady growth in the top line (Sales). The analysts consensus estimate for Sensex EPS of 1250 at the start of the financial year has already been downgraded to 1175 after first quarter earnings. There is a possibility of a further downgrade of 4-5% in the ensuing quarters, as IIP numbers stumble and inflation continues to soar. The RBI continues to signal that it is not going to end the fiscal tightening till the inflation is on the boil, so markets are expecting another round of rate hike in the October policy review. This does not auger well for the bottom lines of the companies.

While the Sensex at 17000 and the Nifty at 5100 seem fully priced at the current levels (trading at around 15 times FY 11-12 earnings), certain pockets of the market are still at very high PE multiples and will need to correct substantially before the markets finally bottom out. Another pull back towards the major support of around 4700 on the Nifty is likely on the cards. That would perhaps be the right time to enter the markets with a medium to long term perspective.Investors may review their portfolios based on the quarterly results announced by the companies. It may be a good time to bet on the beaten down sectors like infrastructure (road construction, ports, logistics etc.) in the next bout of panic selling.