Stock-pickers betting on an Indian economic rebound may be disappointed by upcoming earnings reports from domestically focused companies, as consumer demand and infrastructure output remain weak and high inflation persists.
Banks including Goldman Sachs, Morgan Stanley and Deutsche Bank have issued reports arguing that cyclicals will help Indian indexes hit record highs this year after shares such as Hero MotoCorp underperformed the index in 2012.
But many fund managers are sceptical. Despite a strong start to earnings season, upcoming results for Indian companies geared to the domestic economic cycle such as top carmaker Maruti Suzuki are likely to be uneven.
"I don't share the excitement about the economic growth or the investment situation in the country," said Walter Rossini, a Milan-based fund manager at Gestielle India, which manages $200 million of Indian shares.
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"There has been no real action (large new investments) so far in sectors like power, energy and roads. I don't see a market-wide trend in earnings," he said, adding he was looking to book profits in shares.
India's benchmark BSE index has gained 3.1 percent this year after surging 25.7 percent in 2012.
Optimism is based on expectations that anticipated interest rate cuts will revive an ailing economy, as well as cheap valuations. Cyclical stocks, including Tata Motors, are among the cheapest in the BSE's 30 constituents, according to Thomson Reuters StarMine data.
Tata Motors is trading at 7.2 times forward fiscal 2014 earnings versus around 14 for the broader BSE index.
Sturdy results from software services exporters such as Infosys, dependent on the global economy, have bolstered sentiment.
But Hindustan Unilever, India's largest consumer goods maker, on Tuesday gave an early warning signal of feeble consumer demand, posting disappointing volume growth that sent shares down 7.5 percent over two sessions.
Hindustan's results could also curb the recent strong gains in retailers' shares such as Pantaloon Retail India after the Indian government last year allowed foreign supermarkets into the country, setting up expectations of stake purchases as early as this year.
StarMine SmartEstimate data for the BSE's cyclical components also paint a cautious picture. These calls focus only on the forecasts for top-ranked analysts, comparing them against wider consensus estimates.
By this metric, power gear maker Bharat Heavy Electricals, exposed to still-sluggish infrastructure spending, is expected to underperform consensus forecasts by 4.8 percent in the fiscal year starting in April, while two-wheeler maker Hero MotoCorp could trail expectations by 3 percent.
Eric Mookherjee, a Paris-based fund manager for Shanti India, which owns about $300 million of Indian shares, said Indian stocks are getting ahead of themselves.
"All this bullishness after a few earnings is a little misplaced," he said.
"Even the consumer companies are not very comfortable with the demand environment," he said.
The argument for cyclicals is based in part on expectations that the Reserve Bank of India will start cutting interest rates on Jan. 29 after nine months of holding steady, supporting an economy set for its slowest growth in a decade.
But some analysts warn against over-estimating the impact on corporate profits, as only sustained easing would have a meaningful impact, a premise that is still uncertain.
Although wholesale prices rose last month at their slowest in three years, consumer price inflation accelerated on higher food prices and could pick-up further after India allowed a gradual rise in subsidized diesel prices, which could temper the momentum of further rate cuts.
"We are in the early stages of an economic recovery. We are also at a stage where the RBI will begin cutting rates. So there will clearly be growing interest in cyclical stocks," said Saurabh Mukherjea, head of equities at Ambit Capital in Mumbai.
"I don't think the recovery will be so strong that those firms will be able to get out of trouble," he said, referring to the companies whose balance sheets "got destroyed" in the downturn.