Banking, finance and select infrastructure stocks featured prominently on analysts’ wish lists in November as sustained business growth, improvement in asset quality and a strong capex cycle boosted their investment appeal.
IT companies, meanwhile, continued to be at the receiving end of brokerages’ sell calls, as per Moneycontrol’s Analyst Call Tracker for November.
Macroeconomic challenges in the US and Europe – the bread-and-butter markets for the domestic software services industry – has dampened the outlook for the entire IT pack, though there are some notable exceptions in the mid-cap space.
But for investors looking to position themselves in relatively ‘safe’ spaces, analysts recommend loading up on frontline banking and infra names.
Street Favourites
Banking and financial sector stocks dominate the optimism list for the month of November, maintaining their momentum post robust Q2 results.
“Banks reported healthy credit growth and improved asset quality but faced net interest margin (NIM) compression on the back of rising funding cost. Term deposits growth was encouraging but CASA remained sluggish. Retail and MSME (loans) grew strongly,” HDFC Securities said.
However, the sector faced an unexpected googly last month after the RBI increased the risk weights on unsecured consumer loans, including credit cards, by 25 percent for both banks and NBFCs.
That said, analysts reckon NBFCs will see a higher impact on growth and profitability versus other financial institutions as they have seen sharpest increase in exposure to unsecured retail lending.
This was reflected in analysts’ ‘buy’ recommendations as well, with banks handily beating their non-banking counterparts.
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SBI Chairman Dinesh Kumar Khara, in an interaction with brokerage firm Motilal Oswal, exuded confidence that RBI’s move will not pose any significant challenge for the bank.
“The overall impact is estimated to be 49 bps – of which 28bps is attributed to unsecured loans and 21bp is due to lending to NBFCs... The bank believes that it is well placed to absorb this impact, as its full year profit will keep CET-1 in the comfortable zone,” Motilal Oswal said in a note.
The bank’s Common Equity Tier-1 (CET-1) ratio, including 1H profits, stands at 11.03 percent, and after this impact, it will still be fairly comfortable at 10.54 percent while the underlying profitability remains strong and will enable sustained growth momentum, it added.
On the unsecured loan book (Xpress credit), while growth has already moderated to 18 percent YoY from 25 percent earlier, SBI said its Xpress credit portfolio has robust underwriting as 96 percent of salaried customers are government employees.
Hot Picks
ICICI Bank retained its tag as the company with the most ‘buy’ calls at 48, followed by SBI (47) and IndusInd Bank (45).
ICICI Bank hogged the limelight during the September-quarter earnings season after posting a 35.5 percent year-on-year (YoY) rise in standalone profit at Rs 10,261 crore, beating estimates.
The company’s net interest income (NII) jumped 24 percent YoY to Rs 18,308 crore as bad loan provisions saw a significant drop.
“ICICI Bank delivered a superior performance in Q2FY24, and we expect a robust growth momentum in advances and deposits, particularly during the upcoming festive season. Diversified loan portfolio, healthy asset quality, digital capabilities, and sufficient capitalisation augur well for the company’s future performance,” Geojit BNP Paribas said in a recent note.
The other sector in focus was infrastructure, with NTPC, Adani Ports and Larsen & Toubro seeing a flurry of ‘buy’ ratings.
“This (infrastructure and engineering) space has been performing very well driven by capex activity, especially from the government side. Spaces like capital goods, infrastructure, engineering have posted strong performance. Margins too for these businesses have been higher, especially since pre-Covid numbers,” ASK Investment Managers noted.
The upcoming elections may moderate capex order inflows, but the long-term outlook for capex remains positive, with significant opportunities in various sectors like metros, railways, tunnels, airports, mining, and the Jal Jeevan Mission, it added.
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However, it is Hindalco which tops the list of companies with the most optimism –defined as the percentage share of "buy" calls in analyst recommendations in total – despite a lackluster Q2 show.
The Aditya Birla Group flagship reported flat consolidated net profit for Q2 FY24 at Rs 2,196 crore, while revenue from operations fell 3.6 percent on-year to Rs 54,169 crore, it said on November 10.
However, analysts believe Hindalco is an attractive bet in the metals sector due to tailwinds like drop in input costs (thermal coal prices), focus on high-margin value-added products and gradual improvement in per ton EBITDA of its US subsidiary Novelis.
Tech Talk
The IT sector accounts for half of the companies on the pessimism list – a trend largely unchanged from the beginning of this year.
IT services companies reported weak performance in Q2FY24, with a median revenue growth of just 1 percent QoQ (in constant currency terms).
High interest rates and negative consumer sentiment in the US and Europe – the biggest markets for domestic software firms – has made 2023 a year to forget for India’s IT majors.
What’s more, analysts do not expect a reversal in fortunes anytime soon.
“An analysis of the commentary of leading global enterprises across verticals does not inspire confidence in a quick rebound in discretionary spending. Cost reduction is front and center for a large number of enterprises across sectors, with cost savings targets that extend well into CY2024,” Kotak Institutional Equities said.
However, it added that the intent to invest in tech remains, with a focus on digitalization, automation, back-end systems and AI initiatives, and catch-up is possible once the macroeconomic situation improves.
“An uptick in deal conversions in 1H CY24 is required to provide a better safety net on FY2025 growth projections,” it further said.
Divi’s Laboratories maintained its position as the stock with the highest percentage of sell/hold calls.
The pharma firm on November 6 reported a 29.50 percent year-on-year (YoY) decline in its consolidated net profit to Rs 348 crore for the July-September quarter, as tailwinds from the COVID-19 drug Molnupiravir faded in the current financial year.
Revenue came in at Rs 1,909 crore, up merely 3 percent from the year-ago figure of Rs 1,855 crore.
Aside from an unfavourable base, analysts had also anticipated softening of overall active pharmaceutical ingredients (API) prices to weigh on the company's results.
“…heightened competition in the API segment poses risk. We believe the company’s earnings may have limited upside potential and margin may remain under pressure in the near future,” analysts at Geojit said.
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