Rising wages and higher interest rates were likely to hit corporate profits from the next financial year and might even rein in a four-year bull run on the stock markets, analysts said.

In the last three financial years, net profits of nearly 3,000 companies covered by Business Standard Research Bureau grew 31.3 per cent, 36.3 per cent and 14.5 per cent, respectively.

"The profit growth (of companies) has been much higher than the top line. We see corporate earnings moderating to 15-20 per cent in the next one year or so. Rising employee costs and interest rates will show up in the bottom line, sooner or later," said Ratnesh Kumar, managing director and head of India research of Citigroup.

HSBC echoed this view. "The earnings growth of Indian corporates stays very strong, but the forecasts point to a deceleration in the financial year ending March 2008. The risk factors are a potential slowdown in revenue, margin reversion and rising interest expense," said Anand Shanbhag, an analyst at HSBC Securities and Capital Markets India.

A deceleration in earnings can erode support to the high PE ratio (price-earnings ratio) of domestic stocks. Citigroup has set a Sensex target of 14,700 by December 2007.

Despite a moderation in earnings, the return on equity (RoE) in the country will be in the region of 20 per cent, which "is not bad", said Shanbhag. A shortage of skilled workforce, which is driving up the wage bill of companies, will be felt across sectors. Wage inflation is an issue as a risk factor in terms of corporate profitability.

On Wednesday, the bellwether Sensex fell by about 3.5 per cent, as global markets, led by the ones in the US, dropped on concerns of a slowdown in the country's economy.

On the valuation of Indian stocks, Markus Rosgen, managing director and head of regional strategy for Citigroup Investment Research based in Hong Kong, said: "We are in the fourth year of the bull market. The market is not cheap and the values are harder to find."

He, however, said there were numerous new business opportunities in insurance, retailing, upstream oil and gas sectors. Citigroup is bullish on IT services, telecommunications, consumer non-durables, large-cap capital goods and media.

"We are advising investors to put money in large-cap stocks, where there are visible growth stories. We will also look at small- and mid-cap stocks whenever we see value," Rosgen said.