Disappointing corporate results pulled down Indian shares this week and technical indicators show the market could see more weakness as investors tone down their expectations. Tax worries could also weigh on foreign funds, the market’s trendsetting investors.

Reliance Industries Ltd should buck the trend and climb when trading resumes on Monday after the energy conglomerate, which operates the world’s largest refinery complex in Gujarat, rode on the best refining margin in eight quarters to beat market expectations with an 8.5 per cent rise in quarterly earnings. The results came after the market closed on Friday. Consolidated net profit climbed to Rs63.81 billion (Dh3.7 billion) for the three months ended March 31 from Rs58.81 billion in the same period a year earlier.

Shares of the company, which has a market capitalisation of Rs3 trillion, ended down 0.6 per cent on Friday at Rs926.85, off one month-high of Rs943.80 struck a day earlier. However, gains will be limited because the share has jumped 16.3 per cent since hitting a 52-week low of Rs796.75 on March 30.

Lower-than-expected revenues from Tata Consultancy Services, the country’s most valuable company and the leading software services exporter, dampened the market and sent its shares plunging 6.6 per cent to Rs2,476.20. March quarter revenue grew 1.6 per cent, below street estimates of 2.5 per cent, and investment bank Citigroup trimmed its forecast for 2015-16 and 2016-17 by 2 and 3 per cent and reduced its share price target to Rs2,640.

The results also cast a shadow on its smaller rivals such as Infosys, Wipro, Tech Mahindra and HCL Technologies. Research firm Gartner Inc said earlier this month that global IT services spending may drop by 0.7 per cent in 2015, a worrying factor for the export-driven sector that gets more than three-quarters of its revenue from overseas clients.

Cautious outlook

Foreign institutional investors, who have bought shares and bonds worth $13.5 billion since the start of January, adding to more than $42 billion ploughed in during 2014, are under pressure to pay up prior capital gains taxes exceeding $6 billion after they lost a case in the court against minimum alternate taxation.

Finance Minister Arun Jaitley has exempted the funds from the tax in his 2015-16 budget, but has declined to intervene on the demand for the previous years.

“It may not be possible for any government after a court verdict, which is a transient court verdict, which is still subject to appeals, to intervene in those particular matters,” Jaitley told a seminar in Washington this week.

The top-30 Sensex fell 1.5 per cent in the week to Friday, dropping to their lowest level in nearly two weeks, and ended at 28,442.10. The broader 50-share Nifty shed almost 2 per cent to 8,606, with its 14-day relative strength index dropping below 50 and indicating the momentum was downward.

Investment bank UBS said it lowered its December Nifty target to 9,200 from 9,600 earlier, citing 6-7 per cent cuts in earnings estimates over the last six months after it became evident that the growth recovery would be slow.

However, the foreign bank remains overweight on India among emerging markets and Asia, and expects interest rates to further ease helping companies and markets positively. It is overweight on banks, coal, oil and gas and petrochemicals, pharmaceuticals, telecoms and media.

It is underweight on IT services and real estate, neutral on auto, consumer discretionary, infrastructure-related capital goods, power utilities and midcaps.

“Our most preferred stocks are Bharti Airtel, Coal India, HDFC Bank, ITC, JSW Energy, LIC Housing Finance, Maruti, ONGC, Reliance Industries, SBI and Sun Pharma,” UBS said.

The least preferred stocks include Bajaj Auto, BHEL, Hero MotoCorp, Hindustan Unilever, Infosys and Jubilant FoodWorks.

Inflation, investment

Consumer price inflation came in at 5.17 per cent in March, below consensus market estimates of 5.4 per cent and compared to 5.37 per cent in February, despite a rise in fuel prices. The data builds the case for a reduction in interest rates.

“Soft underlying price pressures in March inflation along with banks beginning to transmit past policy rate cuts reinforces our call for a June rate cut,” said Kotak Securities, which like most brokerages expect a 25 basis points reduction, probably even before the next monetary policy meeting in June.

The central bank’s repo rate, the main policy rate, is currently at 7.50 per cent after two reductions of a cumulative 50 basis points since January 15, and the expectation is that it would be lowered to 7.25 per cent.

“The possibility of further easing beyond June remains contingent upon greater clarity around the likely 2016 inflation trajectory and the impact of a potential Fed rate hike in H2 2015,” Siddhartha Sanyal and Rahul Bajoria at Barclays Capital wrote in a report.

“Given that continued benign trends in inflation and inflation expectations could provide room for further easing, we note the risk of further cuts in the repo rate cut beyond our June forecast. However, with inflation likely around 5.5-6.0 per cent in the first quarter of 2016, we believe the RBI will prefer to avoid cutting rates aggressively in the coming months as it has repeatedly flagged its preference to maintain a real repo rate of 150-200 basis points.”

Meanwhile, while shares are in consolidation mode, big foreign investors are using the opportunity to build positions. Temasek, the investment arm of Singapore, has agreed to invest more than $150 million rupees in generic drugmaker Glenmark Pharmaceuticals, picking up stock through a preferential offering.

Ola, India’s biggest online cab-booking service, raised $400 million from investors led by Russian billionaire Yuri Milner’s DST Global. The company, which acquired rival TaxiForSure in March for $200 million, is building a war-chest to battle other domestic rivals and US-based Uber that is expanding in India.

The writer is a journalist based in India