Earnings preview: This sector will deliver most of India Inc’s profits in Q4

Indian companies are set to declare their earnings for that period over the next few weeks and that scorecard will play a huge role in determining the direction of stock markets at the beginning of the new financial year.

Amid the multi-year surge in global commodity prices and the threat of funds returning to the US, analysts and money managers believe that banks and financial sector companies are going to be the key drivers when it comes to Jan-March corporate profits.

“Adjusted PAT (profit after tax) is likely to grow by 32% y/y, largely driven by strong performance from Banks,” YES Securities said.

“For financials, NII (net interest income) growth is likely to be strongest in the last 8 quarters as credit offtake picked up during the festive season,” the brokerage said.

Elara Capital believes that financials are likely to contribute a lion’s share to incremental earnings in the quarter gone by with their share at 58 per cent on a year-on-year basis and 34 per cent when viewed sequentially.

The financial services firm pegs overall growth in profit after tax for Nifty50 companies at 15 per cent year-on-year in Jan-Mar. Stripping away, financials, however, that growth would dip to 8 per cent on-year, it said.

Just for financials, YES Securities believes that profit after tax could grow at a “staggering” 40 per cent year-on-year.

The key factors that may propel financials are a continued easing in credit cost strain and an improvement in loan growth.

The latest official data on banks’ sectoral deployment of credit is certainly encouraging, suggesting a firm pick-up in loan disbursements across key areas, with overall non-food credit registering an on-year growth of 8 per cent in February 2022.

Year-to-date the rise in non-food credit clocked in at 6.2 per cent, signalling that the overall credit growth for the previous financial year could be above 9 per cent, sharply higher than 5.5 per cent in 2020-21 (Apr-Mar), ICICI Securities had said last week after the data was released.

YES Securities did warn, however, that the operational performance of financials – gauged by pre-provision operating profit- could remain flat on a year-on-year basis, registering a mere 4 per cent growth despite a favourable base.

“We think that the third wave was short-lived and its impact on asset quality should be minimal. Similarly, the impact from the Russia-Ukraine war should not be widespread and severe,” the brokerage wrote.

“Sequential evolution of provisions would be a function of not only slippages but also of writebacks in 3QFY22 and pre-existing provision buffers.”

YES Securities expects provisions to sequentially decline for HDFC Bank, ICICI Bank, Bank of Baroda and Federal Bank while predicting a rise in provisions for Axis Bank, Kotak Mahindra Bank and a marginal increase for State Bank of India.

NIFTY IMPACT

Financial services occupy a whopping 36 per cent weight in the Nifty50 index and the sector’s earnings are therefore likely to play a key role in charting the course of the index.

Moreover, given that the Nifty Bank vastly underperformed the headline index in the last financial year – delivering returns of 9 per cent versus the Nifty50’s world-beating 19 per cent – expectations of banking stocks providing fresh legs to any rally are high.

Bank stocks reacted well to the Reserve Bank of India’s policy statement on Friday, with the Nifty Bank rising 0.5 per cent, as analysts believe that the central bank has set the stage for interest rate hikes in coming months.

For adequately-capitalized banks which boast healthy credit portfolios, a rise in benchmark policy rates works well as loans rates go up, boosting interest margins.

“Bank Nifty post the US data and our RBI policy has taken good support at 37,000 levels. Now it needs to sustain above 38,300 levels to look for a further target of 39,500 to 40,000 levels. The support for the week would be at 36,600 and resistance would lie at 39,000 to 39, 500,” Vaishali Parekh, Technical Research Analyst at Prabhudas Lilladher said.

The Nifty Bank settled at 37.752.05 on Friday. With the Nifty50 ending the previous week close to the 17,800 level, technical analysts are optimistic of the index moving towards targets of 18,100-18,300.