Consumption spike steers stocks

What has put the steam back in the performance of Indian companies is a revival in consumption in the fourth quarter,with most reporting double-digit growth in earnings. However,challenges remain in upcoming quarters in the form of rising costs that could crimp margins.

Of the 66 company results polled for the Jan-March quarter,more than half reported double-digit growth in profit,helped by an increase in sales for the second consecutive quarter.

Earnings in the Jan-March quarter were buoyant due to the base-effect,as most companies reported lower profits or losses in the year-ago quarter due to the financial crisis.

Stronger domestic consumption also led to resurgence in auto sales,incremental retail offtake and a spurt in real estate activity in metro cities,while pharmaceuticals reported robust earnings on higher domestic and US sales,analysts said.

The quarterly results indicate economic recovery is on its way. There is optimism in the air,said V.P. Chaturvedi,managing director of Tata Asset Management.

But there is a severe trend of margin compression,even though there is topline growth,because of rising input cost.

Food price inflation has been stubbornly high and the government,under pressure from the public to get prices down,is hoping forecasts for a normal monsoon this year help to ease food supply constraints.

India8217;s food price index rose 16.23 percent in the year to May 15,while the fuel price index rose 12.08 percent.

High inflation could tighten household budgets and dent demand for goods like cars and consumer durables,which have seen a recent spurt in sales,analysts said.

Results will stop surprising us from June quarter as base effect catches up and because of higher input cost,said Ambareesh Baliga,vice-president,Karvy Stock Broking.

The benchmark 30-stock BSE index is down 5 percent from April 13,when IT bellwether Infosys Technolgies inaugurated the latest earnings season.

Another key worry for investors remains the rise in interest rates expected for the third time later this year even if weaker manufacturing growth and concerns over Europe8217;s debt crisis keep policymakers stick to the status quo for now.

The Reserve Bank of India has already raised its key policy interest rates twice this year in 25-basis-point increments as the economy and inflation picked up,with an easing of the global economic crisis.

There is a feeling that interest rates may go up,but the market hasn8217;t yet priced in a 50-100 bps hike from RBI,said Arun Kejriwal,director at KRIS,a research firm based in Mumbai

With the base rate kicking in from July 1 at banks,funds are likely to become expensive for corporates,Kejriwal said.

Cost cutting will remain a key challenge and the performance of the firms in the coming quarters will depend to a large extent on their ability to manage costs,analyst said.