Infy, TCS Q1, IIP to drive sentiment week ahead

Moneycontrol Bureau

Quarterly earnings of IT biggies Infosys and TCS, and the index of industrial production for May will be the key triggers in the upcoming week, as the market digests the gains made in the last few weeks.

Initial euphoria over Prime Minister Manmohan Singh’s upbeat remarks on the economy and policy decisions has subsided, and investors will now be looking to some concrete action. Already, Planning Commission Deputy Chairman has admitted that India is unlikely to see an average 9% growth over the next five years, and even an 8-8.5% growth would be possible only with some “major effort”.

On the earnings front, expectations from the IT sector are low, as gains from a steep rupee depreciation would be largely neutralized by weak demand. Most analysts are betting that Infosys will lower its guidance numbers for the current financial year as it grapples with difficult business environment as well internal issues.

TCS did better than Infosys during the March quarter, and is expected to maintain the momentum in the June quarter too. But TCS backers among analysts feel the stock is reflecting much of the positives and appears to be fairly priced at these levels. HDFC and HDFC Bank too will report first quarter earnings next week. Both these companies have been consistent performers and unless the numbers surprise sharply on either side, they will largely be ignored.

On the whole, most analysts are expecting more earnings downgrades than upgrades across sectors, even if they see the pace of downgrades slowing somewhat.

The May IIP number will be closely watched for signs of the economy’s health. After a decline in March and flat reading for April, here too, market expectations are low. A slightly positive number may not do much to lift mood, but a slightly negative reading could have a bigger impact. More so, because the RBI has made it clear that inflation, more than growth, is its priority for now. So any cut in interest rate would depend on inflation coming down, rather than growth slowing.

Not much cheer on the currency front either. The European Central Bank’s decision to cut its benchmark interest rate and the consequent strengthening of the dollar threatens to wipe out the gains made by the rupee over the last week.

In global events that could have a bearing on sentiment, finance ministers of Eurozone nations will be meeting on Monday, to discuss financial assistance to Spain, Greece and Cyprus, and operational details of the European Stability Mechanism.

"Markets will be hoping that the meeting of European finance ministers scheduled for 9 July will provide more concrete details on the expectations raised by last week’s summit, most particularly on the process for bank recapitalisation. But the more markets rally in the interim, the bigger the risk that the pressure is reduced on the politicians to deliver in the short term," writes Christopher Wood of CLSA in his Greed & fear newsletter.

Jobs addition in the US continues to be lower than expected, further dimming outlook on the global economy, and in turn, risk appetite.