Lower costs help midcap firm profits; sales still a worry

By Nandita Bose and C.J. Kuncheria

MUMBAI/NEW DELHI (Reuters) - 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 percent since it opened on Oct 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 percent 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 percent and warned of possible asset bubbles. Staffing services firm naukri.com has forecast wage levels rising in high single digit percentages.