Mumbai: The net profit of 137 companies that have so far declared their fiscal 2010 first-quarter earnings grew at the fastest pace year-on-year in eight quarters, fanning hopes of an early recovery from the economic downturn, but some analysts caution that it may be premature to start celebrating.

Modest show: The five Nifty companies that have announced results so far reported far less spectacular numbers than the other firms. Bloomberg

“The June quarter results were expected to be the worst. But full marks to the corporates who have been working continuously on improving margins despite the challenging environment. The Q1 numbers on the whole have been far better than expectations," said Mehraboon J. Irani, senior vice-president for portfolio management services at Centrum Broking Ltd.

“In many cases, you would see the increase in profits exceeding the increase in sales. Also, the fall in commodity prices globally has helped keep costs in check," he said.

The Indian economy, Asia’s third largest, grew 6.7% in the year ended March, the slowest pace since 2003, in the face of a global recession. Companies have been trying to reduce costs to improve profit margins and counter slowing demand for goods and services as economic growth slowed in the second half of the last fiscal.

Also See Quarterly Performance (Graphics)

A Mint analysis of the results of the 137 firms—including five that are part of 50-stock Nifty—shows that their net profit for the three months rose 33.09%, almost three times the growth seen in the June quarter of fiscal 2009.

This is the fastest pace of growth posted since the 39.6% the firms recorded in the June 2007 quarter. In the three months ended March, the last quarter of fiscal 2009, net profit for this bunch of firms grew by a mere 9.28%.

Despite cost cuts, the five Nifty companies that have announced results so far reported far less spectacular numbers than the others.

Infosys Technologies Ltd, Axis Bank Ltd, HDFC Bank Ltd, Tata Consultancy Services Ltd (TCS) and Larsen and Toubro Ltd (L&T) averaged a modest 19% net profit growth. Sales of these companies grew 12.75%, 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 has improved its operating efficiency by keeping staff costs in check. Last Friday, it reported the first ever quarterly decline in headcount in the June quarter. This has helped India’s largest software services provider record growth of 19% in net profit, even though sales grew by a slower 12%.  Infosys too posted better-than-expected results.

Private sector lenders Axis Bank and HDFC Bank have managed hefty profit growth despite declining advances and deposits, largely because of trading gains and income such as fees and commissions.

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. India’s largest engineering firm L&T’s net profit does not look impressive after excluding its other income—gains from the sale of a minority stake in UltraTech Cement Ltd.

Hitesh Kuvelkar, an associate director at First Global Research, finds L&T’s results a “little disappointing" and the  earnings of banks “better than expected". He also cautioned that the average growth in earnings will be much lower when more firms announce their quarterly results.

“We are expecting a high single-digit growth," Kuvelkar said.

Ahead of the earnings season, most brokerages had predicted a no-growth scenario for fiscal 2010 and expected things to get better only in the next fiscal.

Irani of Centrum said the call still stays good. “We have not changed the growth outlook for Nifty companies at 0-2% in FY10. Considering (the) first quarter itself has not been so bad, we expect this target to be achieved. But we are expecting an earnings growth of 18-22% in FY11."

According to Anand Tandon, director of equities at Brics Securities Ltd, companies that have done well are the ones that were expected to do well.

“Consumer sectors which have benefited from the increased disposable income following the pay hike of the government staff have reported good numbers. Automobile sector is a surprise, helped by a fall in steel prices," Tandon said.

At least some analysts are saying that the worst is over, and Kuvelkar of First Global is one of them.

“We have touched the bottom. Apart from the sectors such as cement, where there is overcapacity, other sectors are looking set for earnings growth in the quarters ahead," he said.

Tandon of Brics Securities, however, said that “only if the remaining companies also spring similar surprises, one can safely assume that we are back on the growth track".  

The stock market, however, seems to have run ahead of valuations. Irani of Centrum Broking said the market is not cheap at a price-to-book value of 2.7-2.8 times. According to him, four factors have contributed to the revival of market sentiment—a turnaround in global markets, abundant liquidity, the government’s decision to go ahead with disinvestment in public sector firms and the revival of the monsoon. “All these are shoring up the confidence," he said. 

The Sensex, the Bombay Stock Exchange’s benchmark equity index, closed at 14,744.92 on Friday, rising the most in one week since May and almost recovering the losses that it suffered after investors, disappointed with the Congress-led United Progressive Alliance government’s Budget, sold stocks. At this level, the market is at a price-earnings, or P-E, multiple of 15 times and many analysts said it’s not too stretched yet.

The P-E multiple refers to the price paid by the market for every rupee earned by the company. It is calculated by dividing share price by earnings per share. Price-to-book value is the ratio of the share price to the book value of firms’ assets.

Globally, strong data on China’s growth and better-than-expected US manufacturing data have brought back confidence to the market. A buoyant equities market helps firms raise money and fund their expansion. “It will help in reducing the stress in the environment, though it may not immediately result in higher earnings," Tandon of Brics Securities said.

Graphics by Sandeep Bhatnagar / Mint