High interest cost to impact Q1 profits: Motilal Oswal

Expectations run high on TCS this morning, as the company gears to release its quarterly figures. The street expects the numbers to come in higher than Infosys. Rajat Rajgarhia, Head of Research, Motilal Oswal Securities tells CNBC-TV18 that TCS is poised for a good result this quarter and topline and bottomline should come in strong for the company for FY12 too.

Of the earning season, he says that this quarter will be more of an adjustment from the guidance or preview given earlier regarding the Sensex EPS. "One may see the aggregates getting adjusted by 1-2%, but we will be surprised if it goes beyond that," he says. However, almost 13 out of the 15 sectors in their universe will report a drop in operating profit margins, he says. On the net profit margin, the impact is far more severe because of the interest rate. Below is the verbatim transcript. Q: First your expectation from TCS later this morning? A: We expect TCS should deliver roughly around 6% plus kind of a dollar revenue growth quarter-on-quarter. In terms of their guidance or their outlook on sector, it has been amongst the most positive one over the last few quarters. Our interactions with them suggests that this year FY12 should be another pretty strong year for them, both in terms of topline and bottomline. Hence, this quarter will be a reaffirmation of that trend continuing for TCS. Q: How has the earnings season begun for you and do you think by the end of this season you will need to adjust or lower your Sensex EPS estimates further? A: Earning season right now mainly had three big companies: Infosys, HDFC Limited and IndusInd Bank. HDFC and IndusInd Bank were almost there what we were estimating. Infosys, this is the second quarter where the markets have not probably liked the earnings as much or the guidance; we have seen the reaction on the stocks on both the quarters. For the rest of the period this quarter, we will see more resilience to our estimates compared to the last quarter because when we made our preview for the last quarter, we were somehow thinking that the top down downgrades were still not factored in into the bottom up numbers. We saw almost 4% downgrade at the aggregate level. This quarter will be more of an adjustment, where you may see the aggregates getting adjusted by 1-2%. But I would be really surprised if we see any downgrades beyond that, just because the composition of earnings is far more broad-based now for FY12 compared to what we have seen for the last four quarters. Therefore, any number between Rs 1170 and Rs 1190 is a good number right now to keep in mind. Q: What are your expectations on these two key stocks in terms of earnings performance this time, SBI for whom it will be an important quarter and Reliance? A: For SBI this will be another quarter where we are going to see a big drop in profits on a Y-o-Y basis. We are as of now modeling in over 40% decline in the earnings. This is mainly because in this quarter again they will have to do a provisioning on some of the changed guidelines that came from RBI last quarter. Also they have at least two more quarters to go before they reach 70% coverage ratio. On the core operating numbers margins will definitely improve, they have taken almost a 100 basis point kind of a hike in their lending rates over the last four months. So operating performance would definitely be better than the March quarter, on the provisioning front that will continue to drag down the net profit. We hope that this is the last quarter where all these adjustments take place and from next quarter onwards the profit run rate will be more stable. On Reliance this quarter has been a very strong on the Singapore refining margins. But we think that the overall GRM for RIL is going to be more between USD 10-10.50. So as of now we are looking at profit number of anything between Rs 5,600-5,700 crore that should be a number we think they will report for this quarter. Q: Aside from earnings what have you made of the news on the mining bill and the impact for some of these metal stocks, some of the natural resource stocks, have you guys collated any potential EPS impact on these names? A: Yes the impact on the mining companies vary from segment to segment. For some companies the impact is high single digit impact on profits. Some of the companies like Tata Steel, JSPL will need more clarity but the impact for them would be single digit. While for some of the companies like Coal India, Sesa Goa, who are pure miners for them the impact is going to be far more severe. This is something which has been doing round for almost last three to four quarters. Even through the fine print which has come in now gives indication that the impact is slightly more severe on the pure miners, which is what is going to lead to a more downgrade into the estimates of these companies. Except for Coal India most of the other stocks have been able to manage this impact slightly better. In case of Coal India it