Lower costs help midcap firm profits; sales still a worry

By Nandita Bose and C.J. Kuncheria

Cost controls and lower raw material prices have helped quarterly profits at many companies beat estimates despite lacklustre sales, but the reasons for growth are fast evaporating as inflation picks up and with no sustained demand rise imminent.

Investors have been less than sanguine over the financials, with the benchmark 30-stock BSE index down nearly 9% since it opened on October 9, when IT major Infosys Technologies inaugurated the latest earnings season.

A Reuters survey of 79 companies showed that while more companies beat consensus estimates on profit than not, the majority of them lagged forecasts for sales.

"We're out of the woods, no doubt about that," said Ambareesh Baliga, vice president at Karvy Stock Broking. "But the exuberance we saw in the last couple of months seems be to a little misplaced."

"With the slowdown out of the way, you're seeing the costs going up. But at the same time, you should have the topline growing as well, which has not actually taken place."

The Indian stock market had risen 18% during the July-September period, as a raft of earnings surprises for the June quarter cheered investors and gave hopes of a recovery.

But the cost advantage may disappear soon with inflation heading for a sharp upswing and there is evidence firms are doling out salary hikes, posing new challenges for firms in sustaining margins.

The central bank last month lifted its inflation target for end-March to 6.5% and warned of possible asset bubbles. Staffing services firm naukri.com has forecast wage levels rising in high single digit percentages.

At the same time, sales and topline numbers do not seem to be heading up anytime soon, analysts say.

"Our domestic market has seen a quantum jump over the previous years. For that to continue to grow and offset our export market losses going forward looks a little difficult," said Arun Kejriwal, strategist at investment advisors KRIS.

Market watchers say stocks look overbought and could be in for more pummelling as the year comes close to a draw.

The BSE index, trading at over 17 times its one-year forward earnings, is more expensive than benchmark indices in most emerging markets, and is just a tad under that of Hong Kong. Pricier bourses include those in Shanghai and Kuala Lumpur. "The market is ahead of valuations," said Ajay Parmar, head of institutional equities at brokerage Emkay Global. "The market is anticipating the Indian recovery will happen very soon but it will take some time."

"We should not be expecting anything great from these two quarters. What we have done, if we are able to maintain that, it will be enough."

(Editing by Ramya Venugopal)