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Now that we are in the Q4 earnings season, investors will want to know expectations for the upcoming results. We looked into Trendlyne’s Forecaster data to see which sectors analysts predict will do well in Q4 and FY23.

The key sectors analysts are bullish on (in terms of growth and share price targets) are IT - specifically mid-tier IT companies - capital goods, agrochemicals, capital markets, and banking. The rise in capital spending, digitization push and opening up of export opportunities are driving growth for these sectors. 

In this week’s Analyticks:

• Growth in the middle: Demand outlook for mid-tier IT companies looks strong in FY23
• Revival in private capex: Spending to go up for capital goods sector
• Export surge: Agrochem players will gain in current geopolitical situation
• Mid-sized banks to grow at a faster pace in FY23
• Steady ship for capital market players: Earnings growth to moderate, but remain steady in FY23

Let’s get into it.

Mid-tier IT cos likely to outrun larger peers in growth 

The IT sector is likely to see strong demand in the coming quarters, despite the slowing global economy. According to analysts like Prabhudas Lilladher and Axis Securities, deal momentum will be robust in Q4FY22. Interestingly, mid-tier IT companies like Coforge, Persistent Systems and Mphasis may grow at a faster pace vis-à-vis top tier companies  like Infosys and HCL Technologies. 

Analysts expect this mid-tier group to see 3.9%-8.5% QoQ revenue growth in Q4FY22 on a constant currency basis. On the other hand, top-tier IT companies  may only see a 1.4%-5.5% revenue growth sequentially.

Notably, the Jan-Mar quarter is a seasonally weaker quarter for IT services. Despite this, mid-tier companies are expected to shine, as they were able to consistently win small-sized deals in Q2FY22 and Q3FY22, while large deal momentum dried-up for the top players. Analysts at HDFC Securities and Axis Securities expect Persistent Systems to lead top line growth in Q4FY22 owing to a ramp-up of large deals. 

Capital goods makers may gain from healthy order books

The government’s thrust on higher infra spending along with rising private capex via the PLI scheme drove the growth for the capital goods sector in 9MFY22. In fact, according to ratings agency ICRA, the order book for both original equipment manufacturers (OEM) and EPC companies is at the highest levels in six years. OEMs also have healthy revenue visibility for Q4FY22 and FY23 with their order book to order inflow ratio at 0.87X as on December 31, 2021. 

Back in Q3FY22, ABB India and Siemens saw strong traction for short-tenure projects. The demand for ABB India’s products were driven by sectors like renewables, water and wastewater, data centres and railways. ABB India's focus is also to invest more capital in highly efficient electric motors and drives, which optimise energy utilisation. Hence, the demand from the renewables segment will continue to be strong in FY23. 

Siemens saw robust demand for waste heat recovery systems from end-user industries like steel, cement, chemical, pharma and fertilisers in Q3FY22. Interestingly, the metals and mining sector is still in a favourable cycle, which bodes well for the company in the coming quarters.

Agrochemical players may gain from a bumper Rabi season in Q4FY22

Harvesting for the rabi season (April to May) is in full swing and farmers are getting better prices for crops like wheat, soyabean, mustard and barley, among others. The prices of these commodities jumped over 35% YoY in April 2022 due to the ongoing Russia-Ukraine crisis and export demand. This is likely to boost farm incomes in H1FY23. Notably, Russia and Ukraine are major exporters of wheat, sunflower, barley, rapeseed, millets and maize. Trade sanctions on Russia and fall in exports from war-torn Ukraine are likely to open up export opportunities for Indian farmers.

Agrochemical players like PI Industries, UPL and Sharda Cropchem may see higher demand for their products as farm incomes and cash flows are set to rise in coming months. Notably, these companies manufacture formulations and active ingredients that are used in fungicides, herbicides and insecticides. 

Philip Capital expects agrochemical companies to sustain their EBITDA margins, as they will be able to transfer the burden of higher input costs to farmers in H1FY23 (post rabi season).

Moreover, Kotak Securities believes that these agrochemical exporters are likely to benefit more from the positive global agri products cycle compared to their domestic counterparts. The net profits of these players may rise close to 19% YoY (on an average) in FY23, backed by higher export demand and sales realisations. 

Banks to report better incomes, lower provisions and higher net profits in FY22

For most banks, loan advances picked up pace in Q4FY22. With the earnings season coming up, this growth in loan advances will show up in the net interest income (NII). ICICI Securities’ suggests that private banks’ NII is likely to grow 20% YoY in FY22.

Brokerages like Axis Securities, ICICI Securities, and Motilal Oswal expect loan growth to boost NIIs for IndusInd Bank, Bank of Baroda, and CreditAccess Grameen Bank in Q4FY22E. According to Trendlyne’s Forecaster results, these mid-sized banks are set to grow at a decent rate both in Q4FY22 and FY23.

Reducing provisions to boost profits 

Provision norms have to be followed by all banks to safeguard their assets, in case they turn into non-performing assets (NPAs). The pandemic forced banks to allocate an additional provision for the Covid-19 event. This ate up the earnings of most banks, which reflected in the fall in net profits, and in some cases, losses.

However, with economic activity picking up pace and business returning to normal, banks are reducing these additional provisions. Emkay Global suggests that with the reduction in NPAs and better recovery rates, net profit numbers may get a boost in Q4FY22.

With the mild effects of Omicron and Q4 being a seasonally busy quarter for the sector, earnings are likely to be strong for Q4 and continue into FY23 as well.

Capital market players to benefit from higher retail activity and IPO issuances in FY23

Easy liquidity in markets, low interest rates and attractive equity market returns added to the market frenzy in 2020-21. The primary beneficiaries of these trends were capital market companies like BSE, Central Depositary Services (India) (CDSL), and Crisil. 

The above companies are set to finish FY22 on a happy note with over 50% YoY growth expected in Q4FY22 revenues on an average, according to Trendlyne’s Forecaster data. However, rating agency ICRA believes that the earnings growth for this space is set to moderate in FY23. Analysts see the average YoY net profit growth for Crisil, BSE, CDSL to taper off to 15% in FY23 from 60%+ in FY22. 

Interestingly, the outlook for the primary market (IPO) looks robust for 2022 and is set to pick-up further after the LIC initial public offering opens (around April-May 2022). According to news reports, close to 35 companies already have SEBI’s approval to raise Rs 50,000 crore, while another 33 companies will apply to the stock market regulator to raise another Rs 60,000 crore in 2022 (excludes LIC). 

Although the growth forecasts are lower for FY23, capital market companies (including broking companies) will continue to witness steady growth in the longer-term. India still has a long way to go in terms of stock-market coverage. According to HDFC Securities, only 5.8% of the Indian population had demat accounts at the end of February 2022, while this figure is 13.5% for China.