Financials, oil and gas expected to increase earnings in March quarter

Among sectors, financial, technology and oil and gas are expected to perform well. However, income could be affected by cost adverse effects in the remaining sectors.

Kotak Institutional Equities expects Q4FY22 net income of its coverage universe to grow 27% year-on-year (YoY), and 16% sequentially, primarily from strong earnings growth in banks, oil & gas and consumable fuels Will be inspired However, excluding these areas, it expects the net income of its coverage universe to grow at a slower rate of 9% year-over-year.

Motilal Oswal Financial Services Limited (MOFSL) results preview echo these views. MoFSL expects Oil & Gas, Financial & Technology to contribute 88% of the incremental earnings in Q4 FY22. Excluding financials, it expects to post a modest 10% growth in Q4FY22 earnings for companies in its coverage universe.

Banks are likely to do well on a strong recovery in net interest income (NII), while healthy asset quality, lower provisioning and better performance of larger banks will improve overall performance. Analysts at Yes Securities Ltd said in the financial sector, NII growth is likely to be the strongest in the last eight quarters as credit offtake picks up during the festive season.

Higher crude oil prices are likely to boost realization of upstream oil and gas companies as downstream companies will benefit from better marketing, refining margins and inventory gains.

Aishwarya Dadhich, fund manager, Ambit Asset Management, said the overall performance of banks and financial institutions is likely to be polarised. He expects autos, consumer staples, pharmaceuticals, chemicals and building materials to lag behind. These sectors will be adversely affected by inflation of raw materials, he added. Dadhich said slow growth (rural) on consumer staples and autos and rising commodity prices would be a double whammy. He added that metals and mining will also see a decline in operational performance.

Kotak Institutional Equities expects negative-to-single-digit net profit growth for the automobile, construction materials, consumer staples, pharmaceuticals, and metals and mining sectors. While metal companies may benefit from rising steel and base metals prices, steel and aluminum producers, dependent on outbound supplies of key inputs, will see cost and margin impacts, limiting earnings growth.

On the other hand, automobile manufacturers are likely to be affected due to production pressure due to chip shortage, high cost of raw materials and rising cost of ownership. Weak demand environment and high fuel, power and logistics costs could impact the construction sector. Pharma companies may feel the pinch of cost inflation and higher selling and general administrative costs in key ingredients.

MoFSL said that the earnings impact for the broader market and economy of the rise in commodity prices is likely to be greater than that of Nifty companies, as the representation of these sectors in the index is marginal. BFSI, IT, utilities and telecom have largely remained unaffected by input cost pressures. MoFSL said strong demand visibility in IT, pick-up in credit growth and normalization of asset quality could support Nifty’s earnings.

On the revenue front, sales for companies under MoFSL’s coverage are expected to grow by 32%, led by higher commodity and energy prices.