Mumbai: The net profit of 100 firms that have so far reported their earnings for the three months ended December grew at the fastest pace in at least 10 quarters. Unlike in the last few quarters, when profit growth was led by cost cuts and lower input costs, increased sales, too, contributed to the higher profit.

The net profit of this bunch of firms increased at an average 42.09%, reinforcing the economic growth story.

While the results beat street expectations, analysts cautioned that these were early days yet, given that the first week of the so-called earnings season typically sees the best numbers. They also said that the next set of significant earnings upgrades will happen only for fiscal 2012.

According to the analysts, investors will seek cues from policy announcements apart from earnings to determine the future direction of the stock market.

“The results were much better than expected," said Andrew Holland, chief executive officer of equities at Ambit Holdings Pvt. Ltd, a Mumbai-based investment management and brokerage firm.

“Volumes have grown and the margin expansion was much better. The operating cost of Indian firms is quite strong and the cost reductions from the first half of this year are paying off."

Graphics: Sandeep Bhatnagar / Mint

These measures continued to help the firms in the three months ended December, too, even when input material prices were starting to rebound. Sales for the set of 100 companies grew 14.9%.

“Revenue growth is coming in," said Apurva Shah, vice-president of research at Prabhudas Lilladher Pvt. Ltd, a local brokerage. “Broadly, the numbers are in line (with) or above expectations."

Economic indicators support the revenue numbers. For instance, the HSBC Purchasing Managers’ Index, a leading indicator of demand, increased to 55.6 in December. A reading of 50 indicates expansion. India’s factory output gained 11.7% in November, the most in 25 months.

“We are going to have an earnings boom," said Raamdeo Agarwal, a director of Motilal Oswal Financial Services Group. “The underlying economic recovery is good, look at the industrial output or exports. That’s reflecting in the results."

The bunch of 100 firms includes four companies that are part of the National Stock Exchange’s 50-stock Nifty index. Like the broader set, all of them beat market expectations by a wide margin, though their earnings growth was modest compared with smaller firms.

These four companies—Infosys Technologies Ltd, Axis Bank Ltd, HDFC Bank Ltd and Tata Consultancy Services Ltd (TCS)—posted an average 14.42% net profit growth, the fastest in eight quarters. Sales of these companies grew 3.52%, the fastest in a year.

The Mint analysis counted net interest income (interest earned on loans minus the cost of deposits) and non-interest income as net sales of banks. For manufacturing and services sector firms, income generated from their non-core activities was excluded from profit calculations.

TCS, India’s largest software exporter, beat forecasts with a 2.9% rise in its December quarter revenue over the September quarter and 33.9% growth in net profit. Information technology bellwether Infosys Technologies’ December quarter earnings signalled a strong revival in the Indian IT services business and the company also raised its forecast for this fiscal.

Private sector lenders Axis Bank and HDFC Bank managed hefty profit growth on higher fee income as well as rising demand for loans from individuals and companies. Axis Bank reported a 30.97% increase in net profit and HDFC Bank declared a 31.6% gain.

Unlike in the past two quarters, when robust earnings were accompanied by a boom in the markets, analysts are cautious when it comes to forecasting the market’s movement ahead of events such as the monetary policy review this month and the Union budget in February.

“We can only rely a bit on the past for forecasting the future," said G. Chokkalingam, head of equities at Barclays Wealth India. “For example, there could be a reversal of the monetary policy. So investors have to be cautious."

The Sensex, the Bombay Stock Exchange’s benchmark equity index, has gained 80.81% since the start of this fiscal year. In the past one month, it has risen only 4% and is trading at 21 times estimated earnings for fiscal 2010, according to Bloomberg.