BFSI to metal: Pankaj Pandey's sector playbook for Nifty's run to 27,000

Time of India

4 days ago

Valuations in the banking sector remain attractive, and foreign investor sentiment toward BFSI has notably improved since October. Further, signs of a capital expenditure revival are becoming more evident, with central government capex rising nearly 60% year-on-year in April. According to Pankaj Pandey, Head of Research at
ICICIdirect.com
, this creates a favourable setup for sectors such as capital goods, cement, steel, and infrastructure. He sees these sectors to be well-positioned to ride the next leg of the market upcycle.
ET Now: Help us understand that what is your view on the markets right now and which are the sectors that you will be focusing on.
Pankaj Pandey:
See, overall, our sense is that Nifty earnings for the next two years could be growing at about 12 per cent compared to 2% what we have seen last year. Last year, because a lot of things are going to normalise, and accordingly, our target for Nifty is 27,000. So, we feel very bullish on the markets across caps, be it large, mid or smallcaps. Now, coming to the sectors that we prefer, there are two sectors which are clearly in our preference list. One is BFSI. We would expect credit growth to recover going forward, which has come down to 10% or even below that, largely because of the relaxation in terms of some of the norms which the RBI had put in earlier. And banking overall is looking good from a valuation perspective. On top of it, since October, our sense is that the FIIs are no longer relatively negative on a big sector like BFSI, so that is one. The other is, we feel there will be a revival in the capex cycle. Last April numbers, the overall central government capex has been up about 60% compared to last year, and most of the conditions are quite conducive for capex to overall pick up. So, the entire capex beneficiary, be it capital goods, cement, steel, infra, so all these sectors or segments are looking positive to us.
ET Now: What are you making of the sector churn that we are seeing in the market? Financials have been the market darling for a very long time now. You have had some up moves come in IT, and now metal is showing some positivity. Do you believe this sector churn is here to stay, or do you believe that strong themes that we have seen continuing to be good so far, could lead the market ahead?
Pankaj Pandey:
So, you are right, there is some sector churn definitely happening. For example, metal as a sector is down about 5% in last one year, but our sense is that post 12% kind of a safeguard duty numbers for some of the steel companies will start perking up, especially for a company like say Tata Steel, because overall sense is that we have seen about $10 kind of a decline in a key input which is coking coal, that should help. On top of it, the price hike of Rs 2,000 to Rs 3,000 is also going to help. While the prices might be slightly soft near term because of the early monsoon, we would want to believe that overall, you will see better volume growth, plus pricing benefit also kicking in. So, Tata Steel, for example, in steel is our top pick. Same is the case with say a sector like cement, that is another sector which has not done much from a price performance perspective, but our sense is that once the monsoon is over, you will see pick up both in terms of capacity utilisation and also in terms of the volume growth and also a bit on the pricing as well. So, from that perspective, that is another sector which we feel is looking good. One needs to be selective in a sector like the auto industry. Auto is disappointing from the perspective of broader growth. You have only selected segments which are delivering well. But on the consumption side, one needs to be very selective. So, again, preference would be real estate. You will have to select autos and hospitals, and hotels is what we prefer.
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ET Now: I just wanted to have your take on what sort of a sense you are getting on the public sector bank side because though you are positive on financials, but the interest is not really getting into the public sector banking space and we also have news flow suggesting that SBI is getting ready for a very big QIP. Amidst all of this, do you believe there is any pocket or any stock that you can highlight for us, which looks good, and what is the overall sense?
Pankaj Pandey:
Oh yes. So, within banks, we are relatively more positive on PSU banks largely because for them, the proportionate share of external benchmark-linked rates is higher. So, their impact on the margins is expected to be less. Just to put some numbers, we were expecting about 12 to 13 odd bps kind of a decline in margin for a bank like HDFC Bank, and some bit of a recouping of this will happen because of the CRR cut to the tune of about four to five bps. But relatively, PSU banks will face lesser margin pressure and credit growth for them is largely on similar lines to what you see for private banks. So, SBI, I cannot talk about, but in the PSU stock, what we are clearly liking is Indian Bank. This is one of the few banks which has consistently maintained ROAs of about 1.3, and we feel that there is a decent amount of valuation catch-up to happen. There we have a target price of 740. But in general, we are liking relatively PSU banks more compared to their private counterparts.
ET Now: They say that there is a Pied Piper effect in the market. Largecaps, they move up and when they start moving up, they have this Pied Piper effect. So can I say that it is soon going to be the midcap private banks and then the midcap PSU banks and then the smaller private banks, then the smaller PSU banks.
Pankaj Pandey:
Oh yes. So, large banks have started to do well, especially a bank like HDFC Bank, where we have a target price of about 2200. Our sense is that a lot of these relaxations, which have started to come from the RBI, are pretty positive. Take a look at a segment like, say, banks' loan to NBFCs, now that segment used to grow in double digits, literally it was flat last year. So, with the RBI's relaxation, we would want to believe that overall, you will see far better credit growth for the banking sector as overall whole. And of all the major sectors, banking is the only sector where the valuations are okay or reasonable. So, banking, our sense is that, is going to do the heavy lifting in the near to medium term, and all signs are pointing to this sector to do well, and eventually it will percolate to tier II banks and also to even the smaller banks. And NBFCs relatively will do slightly better in the near to medium term, largely because of the lesser impact, or also because of the fact that the overall margin decline is expected to be a lot less for them, in fact, it is beneficial for them.
ET Now: Of late, the digital stocks have taken a step back, Zomato, Paytm, I am just talking about the near-term price action. Is it in line with this broader sectoral rotation?
Pankaj Pandey:
Probably the challenge with some of these new-age companies is that the path to profitability is still not very clear. So, we are very selective in this entire space. What we are liking in new-age companies is something like, say, for example, Dixon or Syrma, where our sense is that the opportunity pie is quite large. So, for a company like Dixon, our target is 20,000. We feel that they can grow their top line by about closer to 35-37 odd percent, bottom line growth could be even more higher given the fact that we would expect a higher value addition and accordingly margin should perk up, but one needs to be very selective because a lot of these businesses are already getting very rich multiples and if path to profitability is not very clear, then somewhere down the line you cannot expect a sustained performance from most of them.
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