WITH the second quarter (July-September) earnings season being round the corner, equity research heads

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and market experts are expecting a contraction in the earnings growth as decline in sales volumes because of stubbornly high inflation and rising interest rates would be key deterrents for the decline in consumer confidence.

On a quarter-on-quarter basis, analysts are predicting a 4-5 per cent decline in revenue growth after witnessing a 19-20 per cent topline growth in the preceding April-June quarter.

“Most of the sectors from automobiles, consumer staples and interest rate sensitive packs had to deal with higher input costs and rising interest rates, which is likely to hurt their overall margins in the upcoming earnings season,“ said Sudip Bandyopadhyay, managing director and CEO of Destimoney Securities.

Recently, a Morgan Stanley research report indicated that gross margins are at decade lows mainly driven by higher raw material costs and stiffer competition.

Competitive pressure is unlikely to reduce, though a fall in commodity prices is more probable given the expected slowdown in global growth. Gross margins are low across all sectors.“

“Market is more concerned about the earnings growth in next financial year as investors fear that a nagging global economic slowdown coupled with higher inflation and rising interest rate could lead to more downgrades going ahead,“ said Pankaj Pandey, equity research head of ICICI Direct.

A Crisil Research study suggested that Indian companies will see a significant moderation in earnings growth and lower Ebitda margins in July-September quarter, with consumptionlinked, interest-rate sensitive and infrastructurelinked sectors likely to face the heat because of lower sales volumes impacted due to high inflation and rising interest rates.

Prasad Koparkar, head ­ industry and customised research at Crisil Research, explains, “Sales volumes in consumption-linked and interest rate sensitive sectors such as automobiles, real estate, textiles, and re tail have been significantly impacted.“

In infrastructure-linked sectors such as cement, capital goods, and construction as well, order book/volume growth has declined. “We anticipate this slowdown to manifest in significantly muted topline growth during Q2 FY12,“ said Koparkar.

Ebitda margins in the second quarter are expected to fall by 100 basis point to 18.5 per cent compared with the previous quarter, while an increase in interest rates could see net margins fall even more sharply, the report said.

Real estate companies may see a five per cent yearon-year decline in revenues and a sharp reduction in Ebitda margins during July September quarter, while automobiles, textiles and steel manufacturers are expected to see a sharp decline in margins on the back of slower offtake and high raw material costs, the Crisil Research report added.

Ebitda margins for cement and construction companies, too, are likely to remain under pressure amid slowdown in pace of project execution as well as rising input costs. IT services providers are expected to report buoyant revenue growth of around 17 per cent on the back of strong pipeline, but Ebitda margins are likely to decline by around 200 basis points due to rising salary costs, it said.