Construction, Real Estate, Infrastructure and Cement will be the biggest sufferers in a stagflation scenario. Top sells will include SBI, BOI and ACC. 

Scenario to 7.5% and 6.9% GDP growth

We have run two scenarios for our coverage in India. The first assumes a further 75bps hike to rates, oil prices of $115/bbl and GDP growth of 7.5% in FY2012. The second, more aggressive scenario, assumes a further 150bps hike to rates,oil prices of $130/bbl and GDP growth of 6.9% in FY2012. Under the first scenario, we conclude that our average earnings would be cut by 6.4% (taking them 16% below current consensus) and under the second scenario, our earnings would be cut by 12.4% (going to 22% below consensus). 

GS forecasting 7.5% inflation in FY 2012

High inflation a harbinger of lower growth, lower margins and compressed multiples

Previous periods of high inflation in India have led to a 200bps compression in EBIT margins, 250-300bps compression in net margins and a 15% contraction to earnings multiples. Against this backdrop, we note that consensus is forecasting a 70bps improvement to EBIT margins and a 30bps improvement to net margins in CY2011E. Our earnings forecasts for our coverage group are 10% below consensus in FY 2012. 

We expect consensus earnings to decline in the months ahead. In this note we seek to identify companies that are relatively insulated from a dynamic of decelerating growth, as well as those particularly exposed to the same.