Moderate Q2 show concern for IT, banking stocks
Banking stocks may underperform in the near term
IT stocks don’t seem overvalued, but lack triggers for the upside in the near term. Festival season may see higher disbursement by banks as consumers open up their wallets to spend on durables, travel and other purposes
New Delhi: Ongoing second quarter results from IT and banking sector present a mixed picture. A lot of the worries ahead of the results have proved to be right. IT companies reported sluggish topline growth due to delay in execution (largely at the client end), but margins improved.
Deal flow was also healthy -- total contract value (TCV) of deal wins were at a record high, however, the execution period of the deals seem to be longer and hence revenue growth visibility remains muted.
IT stocks don’t seem overvalued, but lack triggers for the upside in the near term. Festival season may see higher disbursement by banks as consumers open up their wallets to spend on durables, travel and other purposes. Banking stocks currently seem to be over owned. Hence, banking stocks may underperform in the near term. Banking services are headed towards getting commoditised.
Only when the competitive scenario stabilises, asset quality fears subside and liquidity situation improves, investors may once again become interested in upping their holdings in banking stocks.
Cancellations, delays and reprioritisation continue to impact discretionary spending. This situation can continue till the geo-political events settle down that could help in eliminating fears of growth slowdown or recession.
Rupee depreciation and cost control seems to have helped in margins inching up. Companies activated a few levers to defend margins.
These include raising utilisation rates, increasing productivity measures, lowering average cost of resources, further cutting subcontracting costs and managing selling, general and administrative (SG&A).
Attrition seems to have come under control, helping the companies plan their resource allocation well and keep manpower costs under control.
