Analyst Tracker: Banks take markets to new highs in June, all eyes on earnings for valuation comfort

Nifty 50 made a series of new highs in June, topping 24,000 for the first time ever.

Bulls roared on Dalal Street in June, with the benchmark Nifty 50 rebounding after the volatile month of May. With election uncertainty out of the way, and results putting Prime Minister Narendra Modi at the helm for a third consecutive term, the Nifty index added nearly 1,500 points, jumping 6.6 percent during June.

Along the way, the index made a series of new all-time highs, topping 24,000 for the first time ever. The Bank Nifty index outperformed during the month, gaining 7.3 percent, or adding nearly 3,600 points.

And, the bull run doesn’t seem to be easing in July as well, with India Inc entering into the fiscal first quarter earnings season. The markets are now eyeing the quarterly corporate numbers to see if the valuations hold.

Will Q1 earnings support market valuations?

The stupendous rise has led to some scepticism, raising concerns that stocks may now be overvalued vis-a-vis fundamentals. However, experts at Motilal Oswal Financial Services and DSP Mutual Fund note that both the market returns and underlying corporate profit growth have matched at 18 percent CAGR over the last five years. Souvik Saha, Investment Strategist at DSP Mutual Fund, says that the Nifty 50 is tracking earnings, and criticism of it being overvalued are unfounded.

Banking and Finance stocks: The beacon of hope

The banking and finance sector has been a significant driver of earnings, which also partially explains why analysts remain most optimistic on these stocks. The (BFSI) Banking, Financial Services & Insurance sector has seen its profit rising at 36 percent CAGR over the last five years, with a relatively modest gain in market capitalisation at 15 percent.

Also read: BFSI stocks gain favour in June, brokerages optimistic on future prospects

The sector has also shown improvement in NPAs (non-performing assets), with high credit growth and a high quality loan book. Analysts expect the momentum on the corporate loan book accelerating going forward. While domestic investors have been on the sidelines, foreign investors are now returning to buy these stocks, which may lead to a rally, analysts add.

In Moneycontrol’s monthly analysts’ tracker, financial stocks gained even more prominance on the list of stocks with maximum optimism in June. As many as six out of the 10 stocks with maximum optimism were banks, NBFCs, or insurance firms. Latest Nifty entrant Shriram Finance topped the list.

As for upgrades, the Bajaj twins - Bajaj Finance and Bajaj Finserv - stand out among the stocks that received the most analyst upgrades over the past one year. HDFC Life Insurance and SBI Life Insurance were among the most upgraded stocks during the last one quarter.

IT sector pessimism deepens

The information technology sector has seen a rise in pessimism compared to the previous month. Four IT companies are now among the 10 stocks with the most negative outlooks from analysts. Earlier, fiscal fourth quarter earnings brought some cheer to the battered information technology stocks, with a slew of brokerage rating upgrades during the quarter.

Also read: Caution continues for IT stocks despite recent upgrades

Not only that, India’s frontline IT companies remain on the list of most upgraded stocks in the last one year. India’s largest IT companies TCS and Infosys remain on the list of maximum year-on-year upgrades. Tech Mahindra and LTI Mindtree have received notable analyst upgrades in the last three months.

However, these upgrades haven’t been enough to turn the pessimism on the sector into optimism, with a high proportion of analysts still maintaining cautious calls on other peer companies’ stocks.

Consumption stocks gain foothold with upgrades, shrinking pessimism

The sentiment on consumption stocks seems to be improving, with Nestle India moving out of the list of most pessimistic stocks. The FMCG stocks also gained favour by way of month-on-month upgrades. Nestle India marked its presence on the list of most upgraded stocks for the second consecutive month. Hindustan Unilever has also joined the list this month, alongside Britannia Industries, which featured in the previous month.

However, this recent positive outlook is mixed with some caution, as FMCG leaders Britannia Industries and Hindustan Unilever are still among the most downgraded stocks year-on-year.

Also read: Tata Motors emerges as top bet in auto sector, rival Maruti Suzuki sees downgrades

Mixed fortune for automobile stocks

Tata Motors is among the stocks that got the most analyst downgrades in the last three months; but, interestingly, top the list of maximum upgrades in the last one month. Analysts turned positive on Tata Motors from the company’s plans to demerge commercial vehicles business into a separate entity and consolidate passenger vehicles, electric vehicles and JLR into another entity.

Other auto stocks such as Maruti Suzuki, Eicher Motors, Hero MotoCorp feature on the list of stocks with maximum analyst downgrades in the last three months as well as in the last one month.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before making any investment decisions.