Biz momentum to increase earnings for banks and IT firms

Siddharth Khemka, head of retail research at Motilal Oswal Financial Services Ltd, said he is positive about information technology and select banking and financial services firms.

Axis Securities Chief Investment Officer Naveen Kulkarni said the next leg of the stock rally will be led by financial services stocks, as banks are likely to post strong earnings growth in the March quarter, driven by improving credit demand.

“Moreover, the trend of improvement in asset quality will continue for the quarter, which will bring more confidence,” he added.

Motilal Oswal has forecast credit growth of 9% and 11.8% for FY12 and FY2013 and banks expect it to grow at 7% and 52% in pre-provision operating profit and net profit respectively for the quarter ended March will provide growth.

With estimation of modest and healthy recovery and upgradation of credit crunch, overall improvement in asset quality is expected, barring medium-sized banks, which may see a steady trend, the brokerage said.

Analysts at Emkay Global Financial Services said the underperformance of insurance stocks is unfair, and investors are ignoring the growth outlook and strength of franchises.

Meanwhile, the demand environment for IT companies remains strong, said Piyush Pandey, principal analyst at institutional equities at Yes Securities Ltd. Favorable currency movements are also positive for the region. For export-oriented sectors, a strengthening dollar means a sharp rise in revenues in rupee terms. Other analysts also expect a strong demand outlook for the Indian IT sector.

“We expect the demand outlook to remain strong in FY23,” analysts at Motilal Oswal said in their earnings preview report. Analysts said the companies expect strong growth amid strong demand for digital and cloud transformation initiatives from enterprise customers. He said trends in recent quarters indicate that demand remains strong.

However, rising costs are a concern, analysts said. Rising employee costs and high job loss rates have been a major concern for margins over the past few quarters. Besides, resumption of travel and higher administrative costs are likely to put some pressure on operating margins.

Sequential revenue growth for the March quarter may also moderate slightly due to the higher base effect.

Analysts at Prabhudas Lilladher said, “Given the strong sequential growth over the past two quarters, we expect revenue growth to decline 150 bps sequentially in the fourth quarter.”

They anticipate a 40-80 bps sequential reduction in margins in the March quarter, led by supply-side pressures and a decline in utilization due to ramp-up in fresher hiring over the past few quarters. One basis point is 0.01%.

Investors will also be closely monitoring for price increases, deal bookings, management comments on the impact of the Russo-Ukraine war and forecasts for employee growth.

“We maintain our positive stance on the sector, as we believe the demand environment remains strong. Accenture highlighted in its quarterly results that only 30% of cloud migration has occurred, and the future outlook remains strong,” Credit Suisse analysts said in a note to clients.