After riding the crest of an election-driven rally for nearly a month, shares in India are expected to pause as investor focus shifts to corporate results and economic issues.

The earnings parade will be kicked off by export-led software services companies, with the appreciation in the rupee’s value a drag on profits even as a pick-up in US and other major economies promising to bolster the outlook for outsourcing contracts.

Infosys Ltd, which releases March quarter results on Tuesday, had doused investor expectations last month by warning that its performance would likely be at the lower end of its forecast. Sector leader Tata Consultancy Services had also said demand was softer than expected.

Reflecting the subdued tone the IT sector index tumbled nine per cent in March, in sharp contrast to a six per cent rally in the blue-chip Sensex.

“We believe this underperformance is attributable to Infosys’ comments on demand softening in fourth quarter of fiscal year 2014 and the INR’s appreciation of 3 per cent in March alone,” Macquarie Equity Research said in a report.

“We think investors are largely sanguine about the demand outlook for the sector, but are wary of a strong rally in the INR,” the foreign brokerage said.

Based on its field checks, HSBC said the sector fundamentals were sound and the demand outlook remains robust.

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“IT stocks may continue to face near-term pressure, but should provide reasonable positive returns in the next 12-24 months, unless INR appreciates meaningfully,” the investment bank said.

Sector leader Tata Consultancy Services reports its earnings on Wednesday, followed by Wipro and HCL Technologies a day later.

Reliance Industries is scheduled to release earnings on Friday and BNP Paribas expects the energy conglomerate to benefit from strong refining margins. But weakness in its petrochemical products could keep overall performance subdued.

Many other companies should turn in sharply improved results and provide a thrust to the stock market, which soared to yet another record high this week.

“For the Sensex, we expect aggregate quarterly earnings to increase a robust 31 per cent year-on-year,” JP Morgan analysts Bharat Iyer and Bijay Kumar said in a report, adding that this number was boosted significantly by Tata Steel which posted a loss in the corresponding previous year.

Excluding Tata Steel, the aggregate growth would still be a healthy 14 per cent, they wrote.

Growth pangs

The top-30 Sensex soared to an all-time high of 22,792.49 before profit-taking clipped the benchmark to close at 22,628.96, still up 1.2 per cent on the week. The broader 50-share Nifty also rose 1.2 per cent to end at 6,776.30 after scaling a new high of 6,819.05.

Heavy foreign bets on a possible stable government after ongoing national elections continue to power the stock market, but there are concerns the rise may be overdone.

Opinion polls have persistently indicated growing support for the charismatic Narendra Modi, whose business-friendly government in Gujarat has helped lure several large investments, but Indian elections can sometimes prove forecasters wrong.

The long-drawn voting ends on May 12 and the results are due on May 16. If Modi has to depend upon significant support from regional satraps to form a government he would be hamstrung to push through any meaningful reforms that are needed to boost growth.

“We believe that even if there is a positive outcome in the national elections, a decisive turnaround in the economic growth and corporate profitability will take some time,” the JP Morgan analysts wrote.

They noted that earnings growth estimates for 2014-15 financial year have been downgraded consistently over the last quarter, despite positive sentiment in the equity markets.

“We would at this juncture caution against chasing beta, particularly low quality financials and investment cycle related names, given the nature and extent of challenges facing the economy.”

Investors will also keep an eye on consumer price inflation on Tuesday, a data that is critical for monetary policy after the central bank kept interest rates unchanged this month despite sluggish economic growth.

The writer is a journalist based in India