Daily Voice | Have green products and services theme on the radar; this analyst explains why

We believe this RE growth story will require a mammoth Rs 20 trillion of funding to fuel the capex needed over the next decade for powering an ecosystem of 436 GW RE capacity. Moreover, electric vehicle foray of Indian players can scale up to significance if credible availability of Lithium as a fuel could be ensured.

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Overall, this is a decadal opportunity which should be on every long-term investor’s radar. Our pick from the power sector to play this theme is "NTPC".

Are railway and defence sectors looking overbought now?

As highlighted in our recent capex report, railways and defence sectors have been prime beneficiaries of the ongoing government’s strategy of investment-led growth in the country. We believe the order book growth and execution figures of these companies will continue to remain robust. Hence, from an earnings growth perspective, these sectors remain attractive, however, valuations are stretched for most of the stocks in these segments.

So, we would advise a cautious approach towards investing in these stocks and wait for a moderation in valuations for a fresh entry. Among our coverage universe stocks, we see "Bharat Forge" getting benefitted from defence sector tailwinds.

Do you see bottom-up opportunities in the pharma space from here on? Do you expect more deals like Glenmark in the space in the coming quarters?

We have a positive view of the pharma sector as the segment offers various promising bottom-up ideas with strong earnings growth at moderate valuations. Healthy sales of limited competition products coupled with ease of pricing pressure are expected to support growth in US generics.

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Further, growth momentum will be led by niche launches. Moreover, domestic formulations are reflecting growth across therapies adding to optimism. We prefer "Cipla" from this space.

Do you really feel the best way to play the current bull market is through financial space? Do you see multiple opportunities in the same space?

While the financial sector remains a long-term proxy to play Indian markets, in the medium term, our preferred space to play the current bull market happens to be the industrial and capital goods sector. The stocks in this space are beneficiaries of India's infrastructure improvement and expansion push, a long-term structural theme.

These stocks have run up a great deal over the past 6-12 months as earnings and expectations have been propelled by the ongoing CAPEX cycle in the economy. Due to the sharp rise, valuations in the space are currently quite stretched, thereby limiting capital appreciation in the short to medium term.

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While there is a structural story being played out in the space, it is not prudent to enter these stocks at their current levels. Investors must either look for value picks or be patient and wait for valuations to correct. Our top pick from this sector is "L&T".

Q: What are the external headwinds for credit growth in the banking space?

We believe that the strongest headwind to credit growth currently is the possible deposit growth moderation going forward. The increased propensity of Indian households to invest in financial assets such as Mutual Funds, Life Insurance funds, etc. means a higher competition for banks to attract deposits. Additionally, the loan servicing obligations of the ~25 percent increase in total system credit over the past 18 months, will decrease the percentage of income that households can potentially save.

These factors can be possible deterrents to deposit growth in the future. Another risk factor to credit growth can possibly be asset quality headwinds in the system. While the overall banking system is currently healthy, very early signs of stress can be seen around, specifically in the unsecured retail space.

If the NPAs for the system start inching up gradually, banks might tighten their credit filters, thereby slowing down credit growth. We prefer "ICICI Bank" among banks, given their deposit mobilization capability.

Is it time to be cautious about the equity markets after the recent peak seen by the benchmark indices?

We are cautious regarding the equity markets at the current levels. The headline index Nifty is currently trading at ~19x FY25 earnings which is above its historic average, indicating that any incremental gains from here must come from improving earnings.

Sustained rise in crude price and weakness in key export markets add downside risk to corporate earnings moving forward. Given the current underlying variables, we remain careful about the equity markets in the short to medium term.

Do you see more downside in the midcap and smallcap segments?

The underlying macro-variables do not support current elevated valuation levels for the midcap and smallcap segments. There is a resurgence of uncertainty surrounding input prices, as seen by increasing crude oil prices over the past month. Corporate earnings of smaller companies are threatened more by input cost inflation as they typically do not have enough pricing power to pass on the costs to their consumers.

The looming threat to corporate earnings, coupled with above-average valuations, make us watchful while investing in mid and small-cap space currently. Relatively, between these two categories, we prefer smallcaps (trading at 24x 1-year forward earnings) to midcaps (trading at 29x 1-year forward earnings).

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 taking any investment decisions.