As many as six sectors -- PSU banks, NBFCs, consumer, retail, and tech -- are trading at a premium to their long-term averages
Indian markets have taken a hit following a sudden spike in oil prices triggered by an attack on Saudi Arabian oil facilities that has escalated tensions in West Asia.
Many stocks are available at attractive valuations in most of the sectors but not all those trading at a discount are safe bets, cautions experts.
The ones trading at a premium could still remain attractive, largely because of sector-specific fundamentals that should remain strong and keep fuelling the momentum.
Six sectors-- private banks, PSU banks, NBFCs, consumer, retail, and tech--are trading at a premium to long term averages.
Premium valuations in these sectors are supported by the continuation of growth which will lay down the foundation of India emerging as a $5 trillion economy, say experts.
“Sectors like NBFCs, consumer and retail have seen considerable PE expansion in the last 10 years, driven by robust growth witnessed in consumption space thus despite the current slowdown and correction, these sectors continue to trade at a premium,” Pankaj Bobade, Head Fundamental Research, Axis Securities, told Moneycontrol.
“One may be tempted to stay away from these sectors amid concerns of a slowdown in the short term, however, it is important to understand the fundamental strengths of these sectors.”
Growth in these sectors in the next five years would be higher than has been seen in the last 10 years, Bobade said. Investing in a staggered manner would help investors reap benefits of India’s growth story “and the short term pain in the equity market has provided the right opportunity to enter in these sectors”, he said.
Pankaj Bobade on sectors trading at a premium to long term averages:
Private, NBFCs & PSU banks
Private banks have led the otherwise disappointing earnings season with improved asset qualities when other sectors are finding it difficult to meet the estimates in the last few quarters.
The plan to merge PSU banks and stricter norms in response to ailing asset quality will limit the alternatives for a borrower, which opens up an opportunity for private banks and large NBFCs to expand the market share.
Technology companies have seen the demand rise amid global slowdown concerns and management commentary across the board has been of continued demand traction for digital solutions.
Consumer and retail
The sector continues to do well with short-term concerns, as rural growth slowed last quarter but a normal monsoon has improved sentiment and the long-term outlook remains intact.
Sectors trading at a discount
Seven sectors trading at steep discount are capital goods, healthcare, cement, infra, media, metals, and oil & gas.
Investors could be tempted to explore the sectors that are trading at heavy discounts compared to their 10-year historical average valuations but experts suggest caution.
“An investor needs to understand what is underpriced and what is merely cheap. Rather than buying these sectors based on discounts that they are trading at, an investor should focus on sectors that could be a turnaround story,” Bobade said.
Ajit Mishra, Vice President Research, Religare Broking, on sectors trading at discount:
Metals, oil & gas
Sectors such as metal and oil & gas are trading at a discount due to concerns over global slowdown that has led to a correction in commodity prices.
Going ahead, we would remain cautious given the highly cyclical nature of these sectors and would recommend avoiding them until there are meaningful signs of revival in the global economic outlook.
Cement, infra & capital goods
Further, lower government spending and lack of private capex have led to a correction in these three sectors.
We are optimistic on these sectors from two-three years perspective. Economic recovery and increased government spending on key areas such as power, roads, railways, infrastructure and housing will support the companies in this space.
The Healthcare sector has underperformed due to regulatory and pricing concerns. Earnings, too, have been below par. We would recommend avoiding the space at this point in time.
For media, the concerns over promoter stake sale and increased debt of Essel group (promoter of Zee) have led to considerable valuation correction in Zee entertainment , which has largely led to underperformance of the sector and situation is no different for other players in the media pack. We would recommend being selective in this space.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.The Great Diwali Discount!
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