Indian shares got off to a gingerly start in 2017, notching up modest gains in the first week, but uncertainties cloud the near-term outlook. Investors have been discounting weak quarterly earnings that will begin rolling in from the coming week, still any worse-than-expected results or guidance could trigger a selloff.
Tata Consultancy Services, the country’s top software services exporter, will kick off the earnings season for major companies on Thursday, and the result is expected to show the scars of slowing demand for outsourcing deals, with the emerging scenario weighed down by US president-elect Donald Trump’s rhetoric to clamp down on jobs going abroad.
Rising protectionist barriers being talked about in the US and in Europe, the world’s two biggest markets, are bad news for global trade. India’s information technology companies must move up the value chain to remain relevant and maintain growth in the increasingly difficult environment.
Software exports from India, the global leader in outsourcing deals, were initially expected to top $121 billion in the current financial year ending on March 31, up from $108 billion in the previous year. However, cut-backs in spending by clients in Europe, caused in part by Brexit, and in the US and elsewhere have pruned those expectations.
“At a time when the world around us seems ever more influenced by the baser instincts and tendencies, we must bring the best of our intentions, and the best of our imagination, our knowledge and our conviction, to all that we do,” Vishal Sikka, CEO of Infosys, the No.2 software services exporter, said in a year-end note to the company’s more than 200,000 staff.
IndusInd Bank, a mid-sized lender controlled by non-resident billionaire Hinduja family, unveils its quarterly earnings on Tuesday.
TCS, Infosys
“Our PAT (profit after tax) estimate stands at Rs. 62.5 billion, down 5.1 per cent on a sequential basis. The decline will be led by lower revenue, profitability and other income,” Motilal Oswal Securities said in a report on TCS.
It said cross-currency movement is expected to shave off 150-160 basis points from its revenue, leading to a 0.1 per cent quarter-on-quarter decline in US dollar terms.
“A pullback in discretionary spend has been weighing on TCS’ performance. Investors will keenly watch the company’s outlook on deal wins, project delays and budgets,” the securities house said.
TCS does not give revenue or earnings forecast for coming quarters or the full year.
Kotak Institutional Equities said: “We expect TCS to be able to maintain stable margin, offsetting the impact of cross-currency headwinds with operational improvements.” The brokerage has a reduce rating on the stock with a target price of Rs. 2,325. TCS shares closed down 2.3 per cent on Friday at Rs.2,281.40.
Infosys Ltd reports earnings on Friday, and investor focus will be on the management’s comments on the outlook. In October, the bellwether company had lowered its annual revenue growth target for a second time in three months.
“We expect Infosys to leave its 2016-17 constant currency revenue growth guidance unchanged at 8-9 per cent though the reported currency guidance could be adjusted for the sharp cross-currency move,” brokerage JM Financial said in a report to its clients.
Infosys, which gets about 90 per cent of its revenue from exports, is likely to report 0.4 per cent rise in December quarter profit to Rs.36.193 billion.
Many brokerages are recommending investors to keep off export-focused technology stocks because of the global uncertainties, but that should not deter anyone to shy away from opportunities that may arise.
“We believe the consensus view of caution on the sector opens a window for contrarian play, at least selectively, in players with a defensive business portfolio, stable/improving cash generation and inexpensive valuations,” JM Financial said.
The top-30 Sensex gained 0.5 per cent over the week to 26,759.23 and the 50-share Nifty rose 0.7 per cent to 8,243.8. But the Nifty IT index fell 2.8 per cent, indicating the nervousness ahead of earnings.
Slowing growth
Although New Delhi has been putting up a brave front, there are clearer signs that the government’s abrupt decision in early November to remove Rs.1,000 and Rs.500 bank notes, which together comprised 86 per cent of the currency in circulation, has eroded the pace of economic growth.
The government said on Friday that gross domestic product (GDP) would expand 7.1 per cent in the current year through March 31, below the 7.7 per cent rise seen before the high-value notes were outlawed. Furthermore, the latest forecast is based on data until the end of October, meaning that it would be revised downwards when actual figures come in.
Most economists predict 2016-17 growth to sink below 6.5 per cent, with one brokerage forecasting below 5 per cent, warning the disruption caused by the severe cash crunch in the wake of limits on cash withdrawals from banks would take many months to return to normalcy.
Factories took the brunt of the slowdown in consumer spending. The Nikkei India Manufacturing Purchasing Managers’ Index fell to 49.6 in December, the first contraction in 2016 and the lowest since December 2015.
“Shortages of money in the economy steered output and new orders in the wrong direction, thereby interrupting a continuous sequence of growth that had been seen throughout 2016,” economist Pollyanna De Lima wrote in survey-compiler Markit report. “Cash flow issues among firms also led to reductions in purchasing activity and employment.”
Worse, the dominant services sector contracted for a second consecutive month in December, pulling down the composite PMI, including manufacturing, to 47.6, the lowest since at least 2013.
“Looking ahead, the currency shortage will continue to hamper activity in the early part of 2017,” Shilan Shah, India economist at Capital Economics, said in a report, adding that growth will pick up slowly as a less cash dependent society and possible reduction in borrowing costs bolster activity.
The writer is a journalist based in India.