The corporate earnings season for the quarter ended December 31, 2008, was one of

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the worst in recent memory. Net sales for the 30-share Sensex increased just 6 per cent in the last quarter from the year-ago period, while the profit after tax slumped 12 per cent.

Disappointing quarterly results and expectations of further earnings deceleration have prompted analysts to slash their estimates for the benchmark index, both for the present and next financial year.

In the past four months, consensus earnings-per-share (EPS) estimate for the Sensex for the financial year ending March 31, 2009 (FY09), has come down by about 15 per cent to Rs 831.54, as of February 27, 2009, according to Bloomberg data. During the same period, consensus EPS estimate for the stock market barometer for the next financial year ending March 31, 2010 (FY10), has fallen more than 20 per cent to Rs 859.

And, the worst is not over yet. Market experts believe that there will be more earnings downgrades for the Sensex in the next 2-3 quarters as demand slackens further.

"Demand is weakening across sectors. We expect to see some more downgrades in the next two quarters," said Sanjeev Kaushik, head of research at foreign brokerage HSBC Securities.

HSBC forecasts Sensex EPS to be at Rs 842 for FY09, while it estimates FY10 EPS at Rs 915.

Kaushik expects the Sensex earnings recovery process to start in the second half of FY10 helped by lagging impact of interest rate cuts and declining commodity prices.

In the past five months, the Reserve Bank of India (RBI) has lowered the repo rate, or the rate at which it lends money to banks, by 350 basis points to 5.5 per cent. It has also reduced the reverse repo rate, or the rate at which it absorbs excess cash from the system, by 200 basis points to 4 per cent.

HSBC sees these interest rate cuts to feed through the Indian economy in 12-24 months, boosting consumer demand and reducing interest expenses.

Edelweiss Securities, which was forecasting 6 per cent year-on-year (y-o-y) Sensex earnings growth for FY09 and 3 per cent growth for FY10 before the Q3 FY09 results, now sees Sensex earnings to grow 5 per cent in FY09 and decline 3 per cent in FY10.

The Mumbai-based brokerage now expects Sensex EPS of Rs 869 for FY09 and Rs 841 for FY10.

“Consensus earnings expectations have been revised down substantially post-third quarter FY09 results. We expect this cycle to continue for the next two to three quarters,” Edelweiss analysts wrote in a strategy note to clients.

Among the Sensex stocks, Edelweiss has slashed its FY10 earnings estimates by more than 20 per cent for DLF, ONGC, Hindalco, ICICI Bank and HDFC.

“Earnings downgrade has been most severe in oil & gas, metals and real estate post-third quarter FY09 results,” Edelweiss analysts said.

Another Mumbai-based brokerage, Ambit Capital, expects corporate earnings over the next six quarters to be severely impacted because of muted revenue growth, disproportionate passing on of input costs, rising power and interest costs, and investment down-cycle.

“Going forward, we expect sectors such as metals, cement, edible oils, and automobiles to witness significant slowdown as realisations dip. Export-oriented sectors such as textiles, auto components, software, and the tyre industry are also likely to report lower business,” said Murali Krishnan, director of research at Ambit Capital.

Ambit Capital forecasts Sensex EPS of Rs 800 for FY09 and Rs 750 for FY10.

Krishnan believes that India’s gross domestic product (GDP) growth for FY10 will be close to 4.5 per cent as the country’s macro environment has deteriorated. The GDP growth rate recorded its lowest in six years in October-December 2008 at 5.3 per cent.

According to Credit Suisse analysts Nilesh Jasani and Arya Sen, another 20-25 per cent downside to their present FY10 earnings estimates for the Sensex is possible.

Credit Suisse forecasts Sensex EPS of Rs 789 for FY09 and Rs 881 for FY10.

“While we had been expecting declines in analysts’ estimates, the magnitude was a surprise. Nevertheless, more downgrades are likely. Our expectation of flat-to-negative revenue growth over the next few quarters implies profits in FY10 are likely to be down about 20 per cent from FY09,” Credit Suisse analysts wrote in a strategy note to clients.

The impact could be more on the Sensex than the broader universes as the index is more heavily skewed toward financials, where we see larger potential downsides in earnings, they added.