Mumbai: The net profit of companies that make up the 50-stock Nifty declined in the quarter ended June from a year ago as higher wages and raw material costs countered sales gains.

While the results produced no positive surprise and have mostly been priced into stock valuations, analysts say profits are still on course to increase 20% this fiscal.

For the 31 Nifty firms that have declared their earnings so far, average net profit fell 6.5% for the three months ended June from a year earlier. Profit for 21 firms that are constituents of the 30-stock Sensex, India’s bellwether equity index, grew 0.17%. All Sensex firms are part of the Nifty.

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Excluding banks and oil firms, the earnings of which depend on factors such as interest income and international crude oil prices, earnings for the Nifty group fell 3.3%.

“Wage inflation and rising cost pressures have eroded profitability of firms," said Sanjeev Patni, president and head of institutional equities at brokerage Prabhudas Lilladher Pvt. Ltd.

A 4 March Press Trust of India report quoted human resource consultancy firm Hewitt Associates as saying that Indian firms may hike salaries by 10.6%, the highest in the Asia-Pacific region, this year.

While this has pushed up employee costs, firms had to deal with increased raw material costs too. For instance, during the quarter, the average price of domestic hot-rolled steel coil, used in cars and buildings, increased some 24% over the year-ago period, and 6.6% from the previous quarter to Rs37,700 a tonne.

“Margins came down because of rising raw material costs, escalating interest costs for some companies and also because of higher capital costs owing to delays in execution of projects", said Deepak Jasani, head of research at HDFC Securities Ltd. “Competition in sectors like telecom, cost pressures in sectors like cement, auto and fast-moving consumer goods and pricing pressures in information costs contributed to the lower margins."

Sales growth was impressive across companies. Sales by volume for the 31 Nifty firms grew 27%, the second fastest pace in seven quarters. For the 21 Sensex firms, sales by volume grew 28%.

These trends are reflected even in the broader market. A Mint analysis of 251 of the 500 top companies listed on the Bombay Stock Exchange shows that despite sales growth of 24%, net profit of these firms declined by 17% in the June quarter. For this set of companies, earnings rose 4% in the previous three months and in double digits for the previous four quarters. The BSE-500 index represents 93% of the exchange’s total market capitalization.

“Overall the results have been below expectations and have failed to excite the markets", said Rajat Rajgarhia, director of research at Motilal Oswal Financial Services Ltd.

While this has already been priced into the markets, which are currently trading at 29-month highs, the full impact of these numbers can only be gauged after all the major firms declare their results, analysts say. Nearly two out of five Nifty firms are yet to declare their results.

“The market seems to have already priced in the effect of good performance by companies. It is only in companies where performance is below par that we are seeing downward movement", said Ajay Parmar, head of research at Emkay Global Financial Services Ltd.

Banking is one sector most analysts were upbeat about because of above-average performance. Most banks are being re-rated upwards, while sectors such as auto and cement are receiving downgrades, they said.

Most analysts are expecting impressive growth in the second quarter due to the lower base in the same period last year, but expect the situation to tighten in the third and fourth quarters because of the base effect.

“The trend has been fairly patchy so far, and by and large there remains a downside risk", said Mohan K.R. Swamy, head of equity research at Royal Bank of Scotland’s local unit. “Commodity prices seem to be hardening again, and while commodity firms may get upgrades going forward, other companies’ margins might get hit."

Still, the long-term view remains bullish given healthy economic fundamentals and the increasing interest of foreign investors in India. Factory output growth has been robust so far with an 11.5% rise in the Index of Industrial Production reported in May, and the central bank forecasts the economy to grow 8.5% this fiscal. According to the consensus estimate of analysts, Indian firms’ earnings will rise by 20% this year.

However, with the exit of fiscal and monetary stimulus under way and global uncertainties such as the pace of recovery in the US economy and the European debt crisis playing on the minds of investors, the road ahead may not be very smooth, especially in the medium term.