Top-line growth in the first quarter of 2015-16 was muted for Nifty companies. Overall, revenue was down 5 per cent year-on-year overall and up 5 per cent (excluding global commodities), as WPI deflation continues to dampen nominal sales.

Overall, earnings declined 2 per cent y-o-y and excluding global commodities earnings were flat y-o-y.

However, EBITDA margins improved sequentially, with some sectors and companies benefiting from benign commodity prices.

Sectorally, power and autos delivered good results, while capital goods, oil and gas and telecom disappointed.

Earnings downgrade Consensus FY16 Nifty earnings estimates have been revised down by over 2 per cent during the earnings season (and 6 per cent in the last three months).

Most sectors saw earnings downgrades, with the highest downward revisions in cement, pharma, metals and mining, and autos; media was revised upwards.

Earnings growth expectations at 17 per cent y-o-y for FY16 are still high, in our view.

It implies a 23 per cent y-o-y growth in Q2-Q4, which is a tough task despite a low base.

Our top-down FY16 Nifty earnings growth forecast is 10 per cent. Metals and mining, cement, autos, and infrastructure/capital goods have relatively higher chances of earnings downgrade.

While volume trends were divergent across players, most auto companies surprised on EBITDA margin largely driven by lower raw material cost.

Demand recovery remained elusive, especially in consumer discretionary segments, though some consumer staples companies saw marginal uptick in volumes. In IT services, pricing pressure continues.

Most pharma companies have reported in-line or better-than-expected results, largely led by pick-up in US approvals.

Private banks continued to report relatively better operating performance, though asset quality trends were mixed.

Road ahead The strong disinflation process under way will throw uppositive surprises in inflation data prints ahead. But growth recovery is likely to be gradual.

The RBI is expected to cut rate by another 75/50bps in FY16-17 because of which we are overweight in financials.

We are also underweight on the two-wheeler segment in autos due to muted growth recovery, rural slowdown and competitive headwinds. We are however, neutral on the four-wheeler segment.

We are neutral on the small- and mid-cap segments, with valuations as an asset class relative to large-caps at highs versus history, and continue to recommend a selective bottom-up approach. Benefits of benign crude oil prices (lower subsidies) make us overweight on oil and gas and petrochemical sector. We are also overweight on telecom, which will benefit from rapid data growth.

We are overweight on coal due to government initiatives to clear regulatory/transportation hurdles but neutral on other metals and mining.

We prefer pharma, especially at current valuations, over IT services.

We expect softer revenue momentum compared with expectations to keep IT valuations in check; we see momentum in digital services resulting in faster legacy compression, leading to slower revenue growth in FY16-18. Our Nifty target of 8,600 implies only a limited upside in the near term.

We remain positive in the medium term, given our aggressive and long-held view on inflation/interest rates, supportive policy/reforms environment and India’s relative attractiveness.

The writer is Head - India Research at UBS

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