Mumbai: The net profit of 133 companies that have so far reported fiscal 2010 second quarter earnings grew at an average 22.5% as they benefited from cost cuts and a decline in commodity prices.

While this confirmed forecasts that the earnings rebound that started at the beginning of this year would continue, the profit growth was slower than the 28.3% increase that the same bunch of firms reported for the three months ended June.

“The results were largely driven by margin expansion," said Rajat Rajgarhia, head of research at Motilal Oswal Financial Services Ltd. “Broadly they were in line or better than what we expected."

Just like in the first quarter, companies posted higher profits as they managed operations more efficiently. Prices of raw materials such as steel, aluminium and rubber, which had declined sharply in the earlier part of this calendar year due to a slowdown in global demand following the credit market seizure, also helped.

However, sales for this sample grew at 5.41%, the slowest in at least six quarters. While tepid sales growth remains a downside risk to growth forecasts, analysts are confident that revenue expansion will start in the second half of the financial year as commodity prices are starting to climb again with a revival in economic growth in other parts of the world.

“Things are happening with the top line," said Ajay Parmar, head of research at Emkay Shares and Stock Brokers Ltd, indicating that demand will bounce back.

For instance, the HSBC Purchasing Managers’ Index, a leading indicator of demand, increased to 55 in September. A reading of 50 indicates expansion. India’s factory output gained 10.4% in August, a 22-month high, again suggesting that economic recovery is gathering steam.

“Overall business is good," said Naresh Kothari, head of research at Edelweiss Capital Ltd. “Automobile and FMCG (fast-moving consumer goods) sales are good. Housing demand is picking up. We’ve had a good Diwali." He expects the cost cut advantages to continue for a couple of quarters more.

Apurva Shah, vice-president of research at local brokerage Prabhudas Lilladher Pvt. Ltd, is one of those who are not convinced yet about the recovery. “Capex (capital expenditure) cycle picking up is the litmus test," said Shah. “The only sector seeing substantial investment is the power sector."

Shah would wait before deciding “whether we are on a steady path of recovery or not".

The bunch of 133 firms includes five companies that are part of the National Stock Exchange’s 50-stock Nifty index. Despite beating Street expectations, these companies have reported far less spectacular numbers than others.

These five companies —Infosys Technologies Ltd, Axis Bank Ltd, HDFC Bank Ltd, Housing Development Finance Corp. Ltd and Tata Consultancy Services Ltd (TCS)—posted a modest 15.9% net profit growth. Sales of these companies grew at 8.4%, the lowest in five quarters. For this analysis, net interest income (interest earned on loans minus the cost of deposits) and non-interest income have been treated as net sales of banks.

TCS, India’s largest software exporter, beat forecasts with a 3.1% rise in its September quarter revenue over the June quarter and 7.1% growth in net profit, helped by demand from customers in recession-hit economies and better employee utilization.

Infosys, too, surpassed forecasts, signalling demand may be starting to recover and that the worst is over for the information technology firms.

Private sector lenders Axis Bank and HDFC Bank managed hefty profit growth on higher fee income as well as interest income on an expanded loan book. Axis Bank reported a 31.95% increase in net profit and HDFC Bank declared a 30.2% gain.

The Mint analysis counted non-interest income as part of the banks’ regular earnings. For manufacturing and service sector firms, income generated from their non-core activities was excluded from profit calculations.

Among others, India’s second largest two-wheeler maker Bajaj Auto Ltd has reported its best operating margins for the quarter at 22%, from 13.5% a year earlier. Its net profit vaulted 117%, beating Street expectations for the second quarter in a row.

According to analysts, the markets seem to have already factored in these gains.

“While these earnings will lay the foundation for upgrades in FY (fiscal year) 2011 estimates, these are very much in the price," said Amitabh Chakraborty, president (equity) at Religare Hichens Harrisons Plc.

Unlike the first quarter, when the Street didn’t expect much in terms of earnings growth, there are high expectations this quarter.

The Sensex, the Bombay Stock Exchange’s benchmark equity index, rose 0.74% on Friday to close at 17,322.82 points. In the one hour of trading held on Saturday to mark the start of the Samvat year 2066 of the Hindu calendar, the Sensex ended little changed at 17,326.01 points.

The Sensex has gained 78.46% since the first start of this fiscal year and is trading at 21.38 times earnings, compared with 8.1 in October last year, according to Bloomberg. At these levels, many stock valuations seem stretched and investors are waiting for another round of upgrades.