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MUMBAI : Financial and software services companies are expected to report strong earnings in the March quarter and a robust outlook for the current fiscal, analysts said.

Siddhartha 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.

Growth expectations
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Growth expectations

Naveen Kulkarni, chief investment officer of Axis Securities, said the next leg of the stocks rally would be led by financial services stocks, as banks are likely to post strong earnings growth in the March quarter, driven by improvement in credit demand.

“Moreover, the improving asset quality trend will continue for the quarter, bringing further confidence," he added.

Motilal Oswal estimates loan growth of 9% and 11.8% for FY22 and FY23 and expects banks that it tracks to deliver 7% and 52% pre-provision operating profit and net profit growth, respectively, in the quarter ended March.

With loan slippages estimated to remain modest and healthy recoveries and upgrades, an overall improvement in asset quality is expected, barring mid-sized banks that could see stable trends, the brokerage said.

Analysts at Emkay Global Financial Services said that the underperformance of insurance stocks is unjustified, and investors are overlooking the growth outlook and franchisee strength.

Meanwhile, the demand environment for IT companies remains robust, said Piyush Pandey, lead analyst, institutional equities at Yes Securities Ltd. Favourable currency movements are also a positive for the sector. For export-oriented sectors, a stronger dollar means faster revenue growth in rupee terms. Other analysts also expect the demand outlook to remain strong for the Indian IT sector.

“We expect the demand outlook to remain strong in FY23," said analysts at Motilal Oswal in their earnings preview report. Companies are expected to post strong growth amid robust demand for digital and cloud transformation initiatives from enterprise clients, the analysts said. The hiring trends in recent quarters indicate demand remains strong, they said.

However, rising costs are a concern, analysts said. During the past few quarters, surging employee costs and high attrition rates have remained a key concern on margins. In addition, the restart of travel and higher administrative costs are likely to lead to some pressure on operating margins.

Sequential revenue growth may also be slightly soft for the March quarter because of a high base effect.

“We expect revenue growth to moderate by 150bps sequentially in Q4, given strong sequential growth in the last two quarters," said analysts at Prabhudas Lilladher.

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

Investors will also closely monitor for price increases, deal bookings, management commentaries on the impact of the Russia-Ukraine war and employee addition forecasts.

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

ABOUT THE AUTHOR

Ujjval Jauhari

Ujjval Jauhari is a deputy editor at Mint, with over a decade of experience in newspapers and digital news platforms. He is skilled in storytelling, reporting, analysing and writing about stocks, investment ideas, markets, corporates and more. He is based in New Delhi.
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