Mumbai: The earnings bounceback that started in the first quarter of fiscal year 2009 likely continued in the three months ended September, but brokerages cautioned that the jump in net profits and margins might not be as sharp. Sales gains are likely to remain a concern similar to the first quarter, though the projections varied from flat to moderate increases.

Mint spoke to seven brokerages and all of them said the upturn will continue, but declined to disclose hard numbers as they were waiting for some September data such as the number of automobiles sold and telecom subscriber additions before finalizing their estimates later this week.

On a roll: The Bombay Stock Exchange’s Sensex has more than doubled in value so far this year. Abhijit Bhatlekar / Mint

A set of strong results is likely to prompt another round of earnings upgrades by analysts as the economic revival story gains traction. It will also make Indian stocks look fairly valued. The Bombay Stock Exchange Sensitive Index, or Sensex, the bellwether equity index, has more than doubled in value so far this year. It’s now trading at 19.5 times the estimated results for fiscal 2010 and some analysts say that this is ahead of fundamentals.

“The market is now waiting for FY (fiscal year) 2011 upgrades. I reckon it will be upgraded by 10%," said Krish Shanbag, head of research at brokerage Antique Stock Broking Ltd. Indicators such as automobile sales and real estate prices have been rising strongly, he said.

“The story is still of margin expansion," said Rashesh Shah, chairman and managing director of Edelweiss Capital Ltd. “Interest costs are low and the impact of low commodity prices" spilled over into this quarter. Shah expected sales numbers to be flat.

A dip in demand as a result of the global financial crisis saw prices of commodities such as steel and crude oil fall sharply in the last fiscal. Although prices have risen since because of Chinese stockpiling and a revival in economic growth, low input costs helped Indian firms post sharp gains in their profits for the three months ended June. A Mint analysis of 1,974 listed firms showed first-quarter profit growth at 19.64% compared with a year ago, while sales fell 7.5%.

The profits of the firms that make up the 50-stock Nifty and 30-stock Sensex expanded the most in four quarters for the three months ended June as they reduced costs and benefited from lower raw material prices, countering the first sales decline in three years.

Margins expanded significantly, often beating street expectations in the first quarter. For instance, Tata Motors Ltd, the country’s largest auto maker by revenue, surprised analysts with a 5 percentage point margin improvement on a quarter-on-quarter basis to 11.4%.

“The first-quarter scenario should continue, but not to the same extent," said Deepak Jasani, head of research at HDFC Securities Ltd. “Margins should go up because most firms have consumed their high-cost inventory. We don't see much top line (revenue) growth in terms of value because of the base effect."

Weak sales a concern

Weak sales remain a concern because profit gains made on the back of operating efficiency and lower input costs are not as enduring as strong demand, said analysts. Indian firms will have to wait for a quarter or two before this happens, they said.

“The top line will start playing a major role only from the next quarter barring automobile firms and fast-moving consumer good makers," said Hitesh Agarwal, head of research at Angel Broking Ltd. Rural demand has not been affected by the weak monsoon as rural incomes have been strong in the last three-four years, he said.

Monthly automobile sales have been growing at an average 16% since the beginning of this fiscal. In August, the latest month for which consolidated figures are available, auto firms sold 1.15 million units, up 24.33% from a year ago. Hyundai Motor India Ltd, General Motors India Pvt. Ltd and Mahindra and Mahindra Ltd posted record sales in September, according to figures released by individual auto makers last week.

There could be some surprises on the sales front, since “festivals this year were ahead and therefore some sales could be advanced significantly," said D.D. Sharma, vice-president of research at Anand Rathi Securities Ltd. Hindu festivals such as Ganesh Chaturthi and Dussehra, considered auspicious times to buy consumer durables, fell in the second quarter this year.

Economic growth indicators have been signalling a revival for some time now and industrial recovery is gaining momentum. For one, the HSBC Markit Purchasing Managers’ Index, an indication of coming growth in the manufacturing sector, rose to 55 in September, up from 53.4 a month ago. A reading above 50 indicates expansion.

India’s industrial output grew 6.8% in July, the last month for which this data is available, reaffirming hopes in the growth story. India’s export decline is slowing as the global economy seems to be reviving. Exports fell 19.4% in August compared with a drop of 28.4% a month ago.

While a fiscal 2011 earnings upgrade might enthuse longer-term investors, in the short term, markets might look at other indicators to sustain this rally. If sales rise, “markets would get another leg-up," said Vinod Kumar Sharma, head of research at Anagram Stockbroking Ltd.