Q1 may be this year's best: Merrill survey

Reduces estimate of 23.8% growth to 15-17%.

The current round of quarterly results may be the best that India Inc can post in the current financial year, says a DSP Merrill Lynch report on India overview this year.

The 40-page report has substantially downgraded the chances of growth in the Indian companies' profits this year, especially for those whose earnings are vulnerable to borrowing costs, global commodity prices and energy costs.

From its own earlier stand of predicting 23.8 per cent growth in profits for the Sensex companies this year, the leading financial service provider has revised its expected growth rate downwards to 15-17 per cent in its India snapshot, brought out earlier this month.

"We believe that as analysts struggled with the rising markets till early May, they tended to take a more optimistic view of earnings prospects to justify their higher price objectives," it says, explaining the previous over- optimistic estimates.

"While earnings for the first quarter this year will be strong, we expect margin pressures to reflect from Q2 onwards," the report says.

The latest revision puts the profit growth in the same range as last year but well below the 25-29 per cent witnessed during the previous three years.

The report, authored by a team of 20-odd analysts, also warns investors against becoming "complacent" in expecting strong earnings growth to continue as they focus on global liquidity conditions. "... earnings have taken a backseat (among investors). We believe there is complacency on earnings growth in India, partly driven by the fact that EPS growth over the past few years has been strong," it says.

The report points out that while rising commodity prices had a beneficial impact on the earnings posted by the Sensex companies in the past, the cycle is expected to pass the peak soon and is likely to dampen the profits of companies in the energy and materials sector.

It says the gains associated with rising commodity prices, which have a positive impact on the bottomlines of the energy and materials sectors, are likely to turn negative.

"In FY05, energy and metals accounted for around 43 per cent of earnings growth (of the BSE 30 companies). This year, we expect this to be 24 per cent and, by the next, they will contribute negatively to earnings," the report adds.

While keeping a cautious outlook on the two sectors "� metals and energy, the report depicts the bleakest outlook for the banking and auto sectors.

It fears that demand may slow down for auto companies, especially two-wheelers, under the pressure of rising oil prices, coupled with increasing loan rates and the added risk of a poor monsoon playing the spoilsport once more. Banks, the report notes, will also suffer, as their earnings from government securities will tumble with interest rates shooting up.