Expert view: Strong opening to Q1 with recovery in banks, says Vinod Nair

We anticipate Q1FY27 earnings season to open on a positive note as business update from the two laggards of 2025-26, banking and IT sector, are showcasing signs of recovery. Banks are affected by constant and relentless FII selling while global AI-driven rout pressured IT. Initial Q1 results of both the sectors are showing signs of resilience heading into the new fiscal year.

As per RBI data ended mid-June 2026, system credit growth accelerated to 17.7% YoY — the strongest pace in two years — while deposit growth lagged at 12%. Credit momentum is broad-based across services, MSME, industrial and secured retail and is expected to sustain through FY27. The private banks delivered balanced, well-funded growth with loans and deposits growing largely in line, while PSU banks posted robust credit growth but lagging deposit mobilisation. Large-cap private banks remain better positioned, supported by superior NIM resilience.

NBFCs added another layer of strength to this narrative, posting robust AUM growth led by gold loans, vehicle financing, and diversified lending portfolios. For FY27, we expect slight margin compression in the first half, driven by the advances mix shifting towards secured loans, intense competition and elevated funding costs, followed by margin stabilisation in the second half as funding costs ease. Banks' NII growth should improve steadily, and we expect earnings growth of 7–11% in FY27, supported by healthy loan volumes, resilient fees and benign credit costs. Key monitorable include FCNR(B) deposit mobilisation and external risks — the West Asia conflict, inflation concerns that may soften growth estimates, and a possible El Nino effect, which could push up rural delinquencies. Nifty Bank trades at a blended forward P/B of just 1.51x, well below its five-year average of 1.99x, offering an attractive entry point with significant re-rating potential as fundamentals strengthen.

The Indian IT sector’s business performance is expected to remain weak in this quarter, with sector leaders likely to report flattish sequential constant-currency growth. However, rupee depreciation is expected to support reported INR revenues and cushion margins, offsetting the impact of soft spending by clients and AI-led pricing pressures. Based on current estimates, Nifty IT index INR revenue is estimated to grow ~14 % YoY in Q1FY27 (versus ~5% a year ago) and EBITDA margin is expected to expand ~30 bps YoY, when Nifty50 margins are expected to contract 100–150 bps.

While the near-term demand environment remains challenging, there are increasing signs that the worst may be behind the sector. Boardroom discussions are increasingly shifting from experimentation to large-scale AI deployment, modernization programs, and productivity-led transformation initiatives, creating the foundation for a gradual recovery in technology spending over the next 12–24 months. Notably, companies are also pursuing sizeable acquisitions to strengthen AI capabilities, add clients, and expand into new regions, a sign they are positioning for the next phase of growth despite the challenging environment. In addition, expectations of monetary easing in the US could revive future IT spending, providing an incremental tailwind to enterprise technology budgets.

Over the longer term, the outlook is steadily improving, underpinned by healthy balance sheets across most IT companies. While the industry remains in transition, companies with strong execution, disciplined capital allocation, deep client relationships, and the agility to adapt to an AI-driven landscape are best placed to outperform over the medium to long term. Meanwhile, valuations have de-rated sharply, with the Nifty IT Index trading at around 16x 1yr fwd PE. For long-term investors, this correction has brought valuations to attractive levels, offering an opportunity to accumulate quality IT names ahead of an eventual demand recovery.

Vinod Nair is the Head of Research at Geojit Investments Limi...