While Nifty Media is the top sectoral gainer in Q2 with a 30%-plus return, Nifty PSU Bank comes next with 27% gains, followed by Nifty India Defence (up 18%), Nifty CPSE (up 17%) and Nifty PSE (up 16%).
Nifty PSU Bank is in fact on the verge of a 13-year breakout to touch fresh lifetime highs on the back of good system-wide credit growth, stable asset quality, and attractive valuations. In between, Nifty Bank, which is dominated by HDFC Bank and ICICI Bank, is flat while the bluechip index Nifty has gained just 2.5%.
Select PSU stocks across sectors like defence and railways have also seen re-rating on robust order books, high revenue visibility, positive news flow, and encouraging government policies.
While the rally in media stocks is being attributed to growth prospects, especially on the advertisement front ahead of state and general elections, PSU banks are benefiting from attractive valuation vis-a-vis the private banking space along with higher confidence about the asset quality going forward.
“As far as the defence sector is concerned, we believe that the growing interest emanates from the fact of having a strong order book which provides revenue visibility and the growing focus of the government on indigenous manufacturing which makes India self-reliant and open doors for exports as well,” Swapnil Shah, Director-Research, StoxBox, said.Last month, Prime Minister Narendra Modi’s statement in Parliament that investors can safely bet on state-owned companies also acted as a sentiment boost.
“What is surprising is that after a phenomenal 2022, they are also having a very good 2023. It shows that when decadal trends change, it does not end in a year. It actually gets elongated,” says Dalal Street’s veteran money manager Atul Suri.
After burning fingers in the past, many old timers of Dalal Street are still keeping away from the PSU basket. “They have given back 40-50% drawdowns. The market has ways of surprising. The trend is your friend until the end when it bends.”
What should investors do?
As the government intensifies efforts to complete numerous infrastructure projects leading to the elections, it is expected to create substantial demand for cement, steel, and chemicals used in construction, as well as construction companies that have secured contracts.
Stocks that are likely to improve their RoEs over FY23 to FY25E and transition into value-creation zones include capital intensive and cyclical sectors such as auto, capital goods & infrastructure, utilities, telecom, commodities and financials, ICICI Securities analyst Vinod Karki said.
“The RoE trajectory provides a sense of ‘déjà vu’ of what happened in the pre-GFC era between 2003-2007 when stocks within capital-intensive and cyclical sectors like L&T, BHEL, Bharti, NTPC, Hindalco, M&M, ACC, Reliance and DLF transitioned from sub-14% level RoE to value creation zone of RoE >15%,” he said.
Global brokerage Jefferies is overweight capex recovery plays including banks, industrial and property. “Our top picks are Axis Bank, ICICI Bank, SBI, L&T, Ultratech and property and select industrial mid-caps including Thermax, KEI, Siemens & Kajaria. We also tactically overweight staples running up to the elections in the expectations of favourable rural policies. We believe that the housing cycle will play out irrespective of the election outcome but the broader capex cycle might slow down in the event that ruling party changes and freebie politics emerges,” Jefferies analyst Mahesh Nandurkar said.
Digant Haria of GreenEdge Wealth, who has taken some money off the table in capital goods, industrial and railways after the recent rally, says stocks have run up a little faster than what the fundamentals have held.
“We have adjusted that into public sector banks and into resources companies which are into mining like Coal India, MOIL or NMDC. I think this is one trade that we feel should hopefully play out in the next six months,” he said.
StoxBox believes that there is still juice left in the PSU banking sector but the defence theme offers little comfort due to stretched valuations.
(Data inputs: Ritesh Presswala)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)