There is a lot of anxiety in the market over the coming results season with the April-June period riddled by high input costs and slower sales growth for many companies. Business Line spoke to Mr Sandip Sabharwal, CEO – Portfolio Management Services, Prabhudas Lilladher to find out his expectations on the June quarter numbers.

Mr Sabharwal believes that the first quarter results will provide some respite to stocks in the financial and capital goods sectors where market has been highly pessimistic. Below are the excerpts from the interview:

What do you think will drive markets in the near term? Do you see earnings improving? How will FY12 be?

The markets in the near term are likely to be driven by the second quarter results. The key factors to watch in the current results season will be the gross margins of companies in light of input cost pressures. Interest costs are likely to go up in any case due to the significant tightening over the last 6 months. However, if operating margins hold up it will be a positive. The factors contributing to the downward risks for the Indian economy have now bottomed out. Earnings will improve significantly in the next financial year as inflation eases off and the cost pressures wear off. This year should be an 18-20 per cent earnings growth year.

Which sectors will post good numbers for the June quarter on a year-on-year comparison? Give us a perspective on sales, PAT and margins?

The markets had become very negative on financials and capital good stocks and as such results could have a positive impact on these sectors. In the technology sector margins will need to be watched closely in line with the wage inflation and higher costs seen lately. Margins should be better than the Q4 of last year but should be down by 50 basis points for the markets as a whole for the first quarter. Some auto sector stocks and exporters can surprise on the upside due to low expectations and a stable rupee in a scenario where a number of emerging market currencies have appreciated significantly.

Will input price pressures continue to take a toll on margins over the medium term for corporates?

The commodity cycle seems to have clearly topped out for now and factors such as a slowdown in the global economy as well as seriousness by China in controlling inflation in its economy will prevent any big upsurge in commodity prices any time soon. With the US Federal Reserve also through with its money printing binge (for now at least) the upside risks to commodity prices due to increasing liquidity has also reduced. We could see restrictions coming on commodity trading or on bank funding of commodity hedge funds at some stage if prices start shooting up again as leaders of many prominent countries have spoken about it in the recent past. Crude oil and other industrial metals could correct more from the current levels given the global slowdown that is underway right now. Steel prices could sell off significantly if China slows down as most of the incremental steel consumption goes to that country.

From when will the current high interest rates start impacting PAT margins for companies?

We have already seen the impact of the same in the last quarter of 2010-11. The peak impact of the same could be seen either in the first or second quarter of the current financial year and we could see margins improving subsequently. Typically we have seen that there is a de-rating of the markets during periods of margin compression and when Profits/GDP ratio shrinks and a re-rating as it expands. The expansion cycle should start from the third quarter of the current financial year and last for the next two years.

Do you see a slowdown in sales for automobile companies and realty players in the forthcoming quarters on rising interest rates? From which quarter will it actually start hurting them?

Automobile companies are already seeing a slowdown. However it is not very drastic. In my view sales are just getting postponed as people adapt to the new scenario. The overall hiring and salary growth picture remains strong and there is a huge amount of buoyancy in the rural markets due to the rise in agri commodity, poultry as well as milk prices.

Real estate sector is already going through a tough phase for the last two years. However the real estate market actually is a dual market in India at this stage where the boom is continuing in the Tier-II and Tier-III towns and cities. The Metros are seeing a downturn in terms of both the residential and commercial sectors. Given the extremely tight monetary policy I believe this divergence will continue for the foreseeable future.

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