Indian shares set to face testing times

After notching gains, mostly tiny, for five weeks in a row, shares in India are set to face testing times. Quarterly earnings are widely expected to show the bruises of a sharp slowdown in economic growth, and could trigger another round of brokerage downgrades. Even export-driven companies such as software bellwether Infosys Ltd, which kicks off the reporting season on Thursday, are likely to be weighed down by the slowing global environment although the steep depreciation in the rupee should soften the blow. Kotak Institutional Equities forecast net income of banking, consumer and technology sectors would improve year-on-year in the June quarter, but energy, metals and mining, real estate and telecom sectors would decline. “We expect net income of the BSE-30 index to grow 9.6 per cent y-o-y, led by the banking [notably State Bank of India], pharmaceuticals and technology sectors,” it said in a report. Excluding the energy stocks, the net income of the benchmark index companies could grow 13 per cent from a year earlier, it added. Factory output data Factory output for May is due on Thursday and the data is expected to reaffirm the problems with the economy. Imports in May were down 7.4 per cent from a year earlier at $41.9 billion (Dh153.869 billion), while exports dropped 4.2 per cent to $25.68 billion, suggesting that factory activity would be muted. The trade deficit in May stood at $16.3 billion, with oil imports climbing 14 per cent to almost $15 billion. For software services companies, which get about 90 per cent of their revenue from exports, tepid decision-making by their Western clients because of uncertainties about their economies would result in slower ramp-ups in volume growth. “Infosys and Wipro are likely to report weak volume growth of 1.2 per cent and 0.3 per cent respectively, in line with their guidance. We expect TCS [Tata Consultancy Services] to top the chart with 4.8 per cent volume growth in Q1FY13,” Pratip Gandhi, analyst at IDBI Capital, said in a report. “We believe the Indian IT sector will have to wait for some more time for better volume visibility.” TCS, the country’s biggest software services company, also reports its June quarter earnings on Thursday. Infosys is likely to revise its US$ revenue guidance downwards to 6-8 per cent from 8-10 per cent on account of weakness in the demand environment and adverse cross currency movement in the June quarter, Gandhi said. Rupee depreciation However, a 7.5 per cent depreciation in the rupee during the quarter may lead to upward revision in the earnings per share in rupee terms. “We expect Infosys to revise its EPS guidance to Rs175-178 for FY13 based on revised US$/Rs55.64. We expect Infosys and Wipro to guide for 2-3 per cent and 1.5-2.5 per cent growth respectively in Q2FY13,” the brokerage said. Clouding the outlook further would be the poor rains. The June-September monsoon season is India’s lifeline, providing the main source of irrigation for farming. The showers have been down by nearly a half on average across the country, with the deficit in some regions as high as 85 per cent. This is bad news for farm output, which contributes about 15 per cent of the nearly $2 trillion economy. Because about two-thirds of India’s more than 1.3 billion people depend on agriculture or related activities for their livelihood, a poor harvest would squeeze incomes in the hinterland and hit demand for a wide range of consumer goods. As drought looms, food inflation, already nudging double-digits, would be a serious threat. It would halt the government in its tracks to cut subsidies, especially on diesel which drives water pumps in the farmlands and is used in tractors and other equipment. The only silver lining that could give a shot in the arm for investors is if Prime Minister Manmohan Singh delivers his promise to open up the supermarket sector to global giants like Wal-Mart and Carrefour, as also relax rules hobbling foreign direct investment in other sectors. From gulfnews