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Dim revenue view, bright on margin

Mumbai, Jan. 6: As India Inc gears up for the earnings season, the forecast for the third quarter is a mix of the good and bad: margins may improve marking the beginning of a turnaround, but revenue growth is likely to remain muted because of the current economic slowdown.

The third-quarter results season kicks off on Friday with Infosys.

“The revenue performance is expected to remain subdued, largely echoing the slower pace of economic growth, and is likely to decelerate slightly compared with the previous quarter,” says Angel Broking.

The brokerage forecasts a year-on-year growth in topline for Sensex companies at 10.3 per cent, lower than the 11.7 per cent witnessed during the second quarter.

The good news is that experts are optimistic about margins stabilising in the third quarter and earnings per share improving on a sequential basis.

“After posting a declining trend over the past few quarters, margins are expected to stabilise in the third quarter. We believe the reforms initiated by the government and the likely monetary easing will support margins in the coming quarter,” says Prateek Parekh and Vivek Veda of Edelweiss Securities.

They expect the third-quarter earnings per share of the companies they cover to grow higher at 6.4 per cent on a sequential basis compared with around 4 per cent year-on-year.

Infosys may disappoint with its numbers. The third quarter is usually weak for IT companies since the number of working days is less compared with the other quarters. Analysts feel other factors such as slower growth in discretionary spends and wage hikes can impact Infosys, and its margins are likely to decline on a sequential basis.

The market will, however, be keenly watching the guidance given by Infosys. It is felt that the Bangalore-based company might lower its growth guidance for this fiscal from 5 per cent it had given during the second quarter. Analysts now expect the company to lower the dollar revenue guidance growth to around 3.5 per cent because of the challenging global conditions.

If the IT sector is expected to face global headwinds, other sectors that may disappoint include automobiles, cement and telecom.

Shining sectors

Sectors such as steel, FMCG and pharma are expected to do well.

According to analysts at ICICI Securities, the FMCG and pharma sectors will see both revenue growth and expansion of margins during the quarter because of lower raw material costs and price hikes.

The capital goods sector may witness a modest improvement in topline though there are apprehensions that the earnings per share will be flat as these companies have witnessed pressure on their margins.

The banking sector is not expected to throw up any major surprises given the trend over the last few quarters.

Private lenders are expected to perform better than their PSU counterparts. Though PSU banks are expected to continue witnessing asset quality pressures, it is felt that margins may remain intact for the sector as a few lenders had reduced deposit rates during the quarter.

 
 
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