Indian shares have shed more than two per cent in the New Year after gaining about nine per cent in 2013, and the near-term outlook is seen tepid in the wake of data showing manufacturing activity under severe strain – dashing any hope for an early recovery in corporate earnings.

After the markets closed on Friday, the government said industrial output in November shrank 2.1 per cent, sharper than a 1.6 per cent drop in the previous month and belying expectations of economists for around one per cent expansion. The contraction was despite a pick-up in core infrastructure sectors such as mining and electricity generation.

Manufacturing, which contributes a little over three-quarters of industrial production, fell 3.5 per cent in November from the same month a year earlier. Consumer durables output slumped 21.5 per cent, indicating that companies were cutting back production because of sluggish demand.

“The data is bound to have a chilling effect on the stock market,” said equity salesman Anmol Bhushan. “It pours cold water on quarterly earnings expectations for companies that primarily depend on the domestic market for their revenue. The exception would be export-driven companies.”

In a quick analysis after the data was released Crisil Research, the Indian affiliate of Standard & Poor’s, said: “Industrial growth is likely to remain weak for the rest of 2013-14 due to infrastructure and input constraints, and weak domestic demand.”

Companies that get a large portion of their revenue from exports or overseas markets such as software services and pharmaceuticals or conglomerates with large operations overseas like Tata Motors and Tata Steel are expected to reap the fruits of a growth rebound in the US and Europe. Utilities and telecom firms should also report stronger growth thanks to improved tariffs.

Infosys, the No. 2 Indian software services exporter which kicked off the earnings parade on Friday, raised its full-year revenue growth in dollar terms to between 11.5 and 12 per cent from a year earlier, citing brighter prospects in its main markets of the US and Europe. The forecast was better than the 9-10 per cent growth it projected in October for 2013-14.

“The year ahead looks exciting for the IT services industry,” said S.D. Shibulal, chief executive officer and managing director of the company that is also listed on the New York Stock Exchange. “We believe the global economic environment has improved and our clients are gaining confidence to invest in their strategic initiatives.”

Bigger rival Tata Consultancy Services and smaller Wipro and HCL Technologies that report their earnings in the coming week should likely announce robust growth. Results from private-sector lenders HDFC Bank, Axis Bank and Yes Bank are also scheduled next week and profit growth are likely to be maintained and investors will be watching their non-performing assets.

“Aggregate Sensex Ebitda margins at 17.0 per cent are expected to show a year-on-year gain of 135 basis points largely led by utilities (+350 bps), metals (+340 bps) and autos (+280 bps). On the other hand energy is expected to show a decline of 120 bps,” analysts Jyotivardhan Jaipuria and Anand Kumar at DSP Merrill Lynch (India) said in a report.

They said state-run energy equipment maker Bhel and government-controlled State Bank of India, the country’s largest commercial lender, would likely be a drag on the earnings report card for Sensex stocks. More brokerage downgrades are also on the cards.

“Since the beginning of the last year, our bottom-up financial year 2014 Sensex EPS (earnings per share) has been downgraded by more than 5 per cent to Rs1,335. We continue to expect further downgrades to financial year 2014 Sensex EPS to over Rs1,275 and estimates for the next financial year for Sensex EPS to more than Rs1,425 from Rs1,580.”

A clearer picture would emerge this week when energy conglomerate Reliance Industries Ltd and leading tobacco firm ITC Ltd, which is nearly a third owned by British American Tobacco, report their quarterly earnings. Motorcycle and scooter producer Bajaj Auto Ltd also releases results next week.

Silver lining

In the midst of the gloomy domestic economic scene, there could be succour when monthly inflation is unveiled on Tuesday. Annual inflation in December is expected to have eased to around seven per cent from a 14-month high of 7.52 per cent in November, according to street estimates.

With factory activity in doldrums any easing in price pressures should prepare the ground for the Reserve Bank of India (RBI) to loosen its hawkish stance, but economists are divided on the possibility. The central bank, which held rates at its last meeting in December after raising by 50 basis points over two reviews, is due to discuss monetary policy on January 28.

“Government policies should be complemented by the shift towards an accommodative policy announcement by the RBI in its forthcoming monetary policy to revive investment and propel demand, especially in consumer durables which are deep in the red,” said Chandrajit Banerjee, director general of the New Delhi-headquartered Confederation of Indian Industry.

There will also be political pressure on the RBI from New Delhi to lower interest rates and help revive consumer spending, with general elections due by May.

However, Bhupali Gursale, economist at Angel Broking, expects the central bank to keep rates unchanged at the review.

Foreign funds, which bought Indian shares worth nearly $20 billion in 2013, have cooled in the New Year with inflows in the first 10 days at a modest $45 million. But Mirae Asset Global Investments (India) believes that overseas investors would continue to pour in because of India’s favourable demographics like rising income and affordability, rich natural resources, low penetration in many industries and relatively better growth prospects.

“It will be difficult to predict the movement of indices but we believe 2014 could pose better outlook for Indian equities,” the foreign investment house said. “In CY14 equity market performance would be based on overall GDP growth uptick, broad basing of growth in multiple sectors and continuous need for reforms.”

The writer is a journalist based in India