Earnings outlook leaves investors with little to cheer

Mumbai: The focus of investors in Indian shares, which have been losing steam since the annual budget in mid-March, will shift to two upcoming events: quarterly earnings and the central bank's monetary policy.

On both fronts the scenario is anything but soothing.

Infosys Ltd, the blue-chip software services company that gets about 90 per cent of its revenue from exports, will kick off the earnings parade on Friday and market expectations on the prospects are muted.

The sector has built a reputation for garnering outsourcing business from large multinational companies and governments in the US, Europe, the Middle East, Japan and the Asia-Pacific. With annual revenue of more than $70 billion (Dh257.46 billion), the sector is a powerful engine for growth and has been one of the biggest creators of wealth for investors.

"The years of 30 per cent or more of annual growth in profits are truly behind us," said equity salesman Mukul Desai. "What's perhaps not so evident is the outlook could be far worse than people anticipate."

The US, the biggest market for the sector contributing more than half the revenue, is putting up roadblocks to discourage outsourcing to countries like India as Washington tries to save jobs in the run-up to presidential elections.

While outsourcing in a globalised economy is inevitable for big businesses to remain competitive, local politics is a formidable bulwark that can override prudent economics.

Adding to troubles

Cash-strapped New Delhi's policies have only added to the troubles facing both services and manufacturing. Optimism about the business outlook in 2012-13 dipped to its weakest level since 2009, a survey showed last week.

The HSBC Markit Business Activity index slumped to 52.3 in March — the lowest in five months — from 56.5 the previous month.

"Activity in the service sector decelerated notably in March, although it is still expanding. New business also ticked in at a slower pace and the sentiment gauge took a dive," HSBC economist Leif Eskesen said in a statement.

The survey showed growth of new business eased and future expectations faded, and pointed to anecdotal evidence the 2012-13 budget dampened sentiment about growth prospects for the economy.

Factory activity also displayed a similar weakening trend, weighed down by slowing growth in new orders while costs of raw materials kept rising.

India's fractious coalition missed the last opportunity to pursue reforms before national elections due in 2014, and the budget rolled out new taxes that could stall foreign investment when it is needed badly to plug a ballooning budget deficit and yawning balance of payments shortfall.

It is against this background that the Reserve Bank of India (RBI) is set to announce its monetary policy on April 17. After raising interest rates 13 times since early 2010, the central bank indicated in December its next move would be a reduction.

In two subsequent policy meetings, the RBI slashed the cash reserve ratio — the percentage of deposits that commercial banks must keep with central bank — by a combined 125 basis points, but has left rates on hold.

With growth slowing sharply and business confidence dented, there is a greater need to lower rates. "It is important to boost investment and growth, which requires rates to go down," Chanda Kochhar, CEO of ICICI Bank, told reporters last week.

A combination of rate cuts and easing of reserve requirements is essential for customers to benefit from lower rates, she said.

The big question is: would the RBI, which gives much weight to fight inflation, oblige? "With inflation pressures still firm, the RBI will have to approach the easing cycle cautiously, and it may have to stay on the sidelines if the inflation outlook does not improve significantly soon," Eskesen said.

The writer is a journalist based in India.