Rupee fall, rising costs may weigh down on Q2 profits

India Inc is likely to post a muted earnings growth for the second quarter of this fiscal, largely due to fall in rupee value, rising interest costs, high inflationary pressures and a global economic slump.

The analysts expect the rupee's sharp depreciation alone to impact the corporate earnings by an average of 3-5%, on account of losses suffered due to their forex exposure such as overseas loans.

Besides, the global economic slowdown, as also headwinds in domestic macroeconomic scenario, might have a ripple effect on the companies' second-quarter financial results, they said.

Investment banking and equity research major CLSA said in its Q2 earnings preview report that the sharp depreciation of rupee is likely to significantly impact the earnings of companies with unhedged foreign currency liabilities.

"Overall earnings growth would be muted due to the one-time impact of rupee depreciation, estimated at 3% of earnings," CLSA said.

Brokerage firm Religare Capital also said that the signs of economic slowdown were expected to be reflected in the Q2 results and the Sensex companies could report a profit growth of less than 9% for the quarter.

Excluding the oil companies, the Q2 earnings growth for the Sensex companies could fall to below 5%, as per Religare Capital estimates.

CLSA has estimated an earnings growth of 7% for the Sensex companies for the second quarter.

Interestingly, the earnings growth of the Sensex companies before taking into account exceptional items such as forex losses is estimated at over 13% as per CLSA.

The earnings season for the second quarter of the current financial year will commence when IT bellwether Infosys would declare its result on October 12. The country's most valued firm RIL is scheduled to announce its results on October 15.

The Q2 results are likely to act as the next trigger for the stock market, where its benchmark Sensex index has dropped by about 14% in the second quarter.

Religare Capital expects good Q2 figures in the IT, banking, FMCG, cement and pharma sectors, while companies in the real estate, telecom, power and metal space could post disappointing results.

CLSA said that the rising interest costs was likely to have affected the margins across the board, making funds costlier for the companies.

It said that the full impact of higher interest costs would be visible from the second quarter onwards and could become a potential source of disappointments.

Making things worse for the corporates, inflation remains at high level despite softening commodity prices, and this has already led to the Reserve Bank hiking its key rates 12 times in the past 18 months to control the price rise.
    
"While the RBI�s hawkish policy has now started hurting business growth, inflation remains meaningful despite the recent softening in commodity prices. Early to say if margins are reverting and if the earnings cycle has bottomed out," Religare said.
    
As per CLSA, the depreciation in rupee value -- of 10% against the US dollar and 15% against the Japanese yen -- would be another dampener for Q2 results.
    
CLSA said that companies like Lanco, Ranbaxy and Tata Power were likely to report loss on this account in Q2, while the numbers could also be impacted of firms like Bharti Airtel, PFC, Suzlon, L&T, Tata Motors, Tata steel, JSW steel and a host of IT companies.
     
Brokerage firm Unicon Financial further cautioned that issues like shortage of fuel and environmental clearances also remain a major concern for the power sector.
    
"The power ancillary companies are expected to post robust earnings on the back of strong order book. However new order inflows for these companies remains slow," it said.