MUMBAI/BENGALURU, October 11 (Reuters): Profits from India’s top firms are expected to have swung back to growth in July-September from a decline in the previous quarter, though economic headwinds are likely to have kept the pace of growth sluggish. The latest results are critical for investors, marking the first quarter since the rollout of a national goods and services tax (GST) on July 1 and coming amid a wider retreat in share markets on investor concern about stocks being overvalued. Forecasts compiled by Reuters show net profits are expected to rise 12.8% in the latest quarter for members of the main NSE index, known as Nifty, marking a recovery from the 1% fall in net profits in April-June. That would be less than half the 33% increase posted in the January-March quarter and lag the 17.7% rise in October-December last year. Profits are expected to be driven by energy and metals firms benefiting from stronger commodity prices, while telecoms are expected to post weak results due to aggressive competition. Drug makers profits are also likely to have suffered, mostly from regulatory challenges in the key U.S. market. However, the impact of India’s new GST on earnings remains the biggest unknown for investors positioning themselves for the earnings season. Uncertainty caused by companies rushing to prepare for the new tax and cutting production dented profits in the April-June quarter more than analysts had initially expected. Fund managers now warn another disappointing set of results could hurt India’s recent bull run. Nilesh Shah, managing director at Kotak Mahindra Asset Management, said markets were pricing in a recovery in earnings in the next 3-5 quarters. He said markets would correct if earnings don’t show a solid recovery. Meanwhile, operating profits are expected to rise 11.5%from a year earlier, while revenues are expected to advance 6.5%. The results come at a time of deep uncertainty for markets . The Nifty has fallen about 1.9% since hitting a record high on Sept. 19, amid heavy foreign selling and rising worries as economic growth slows to its weakest pace in three years. The Nifty is trading at a price to current fiscal year’s earnings (PE) ratio of 21.3, a healthy premium over the historic 5-year average of 16.8. Investors say the GST’s impact is hard to measure given it can affect virtually every aspect of the economy from consumer purchases to industrial production. Some manufacturers are expected to have restored inventory levels in the latest quarter. “We had seen an uptick in terms of re-stock in July, which was positively received by the markets,” said Sunil Sharma, chief investment officer at Sanctum Wealth Management. “But the dip in consumer and business sentiment alongside GST implementation pains are causes for concern in the shorter term.”