BSE Bankex climbs 17% in February; time to add PSBs in your portfolio?

Benchmark equity indices BSE Sensex and NSE Nifty have soared more than 10% as the budget-driven market euphoria continues to drive sentiments. The 30-share index has advanced 5,043 points to 51,329 on February 9 from 46,285 on January 29 last month. Likewise, the 50-share index has added 1,475 points during the same period.

Among the sectoral indices on the BSE, the Bankex gained the most 17.49%. It was followed by Metal index (up 14%), Capital Goods (up 13.86%) and Realty (up 13.61%).

In an interview with Money9, Siddhartha Khemka, Senior Vice President, Head-Retail Research, Motilal Oswal Financial Services, shares his views on the ongoing rally on Dalal Street and what it holds for retail investors.

Edited excerpts:

Q: Should an investor stay put or partially book profit now?

Khemka: Equity markets are currently near their all-time high levels and are still showing resilience on the back of a broad-based economic recovery, a second consecutive quarter of strong earnings, continued FII inflows, India’s vaccine distribution and favourable policies from the government as well as the central bank.

Further, a pro-growth and capex driven budget led to a sharp improvement in market sentiments. From an equity market perspective, the budget has turned out well, with no negatives on the taxation front and several long-term structural initiatives that augur well for medium-term growth. The push for capex and investments could trigger the revival of an investment cycle.

While intermittent corrections or profit booking cannot be ruled, the overall structure of the market remains positive. Hence, we would advise investors to stay put in in the India story and keep accumulating quality stocks on any dips, as we believe that we are just at the start of an earnings upgrade cycle. Further liquidity flows across emerging markets are likely to remain strong which bodes well for Indian markets as well.

Q: In which sectors do you think retail investors should increase their exposure?

Khemka: The market focus is clearly on fundamentals. Corporate earnings growth are showing tangible momentum. Earnings upgrades are seen for the second consecutive quarter. Overall, from the next 12 months perspective, we are positive on IT, select BFSI, healthcare, telecom, auto and consumer sectors.

Further, the budget has focused on growth revival as the central theme and the government choosing to use capex / infra investments as a vehicle to drive growth. The push for capex and investments could trigger the revival of an investment cycle, which could then spread to multiple sectors–cement, capital goods, infra and construction, real estate and metals.

Q: What is your take on midcap and smallcap counters?

Khemka: After underperforming for the last two years – mid and small caps are showing signs of strength and the momentum may continue in 2021. Opening up of the economy, the sharp reduction in active Covid-19 cases since September 2020, and strong high-frequency macro data have uplifted sentiment. The vaccination drive has further provided a boost to the Indian market, with much broader participation from mid-caps and small-caps.

The drivers of earnings growth are incrementally shifting towards cyclical sectors. Lower interest rates, the prevalence of abundant liquidity, and broad-basing of economic recovery augur well for mid and small caps.

While we are positive on the mid and smallcap space – we don’t believe that there would be a broad-based outperformance. One needs to be very selective within this space and look for high-quality management with strong business growth drivers.

Q: Which stocks are in your buying list from the broader markets?

Khemka: The confluence of economic recovery, containment of Covid-19, earnings beat, and an expansionary budget has kept the market in good spirits. With the budget behind now, the focus will be back on corporate earnings, which are witnessing solid momentum, with a broad-based beat and upgrades. Cyclicals are driving earnings at the margin and with a capex boost in the Budget, it could continue to remain in favour in the near term. From the broader market, we like ideas such as IEX, Varun Beverages, AU Small Finance Bank, Crompton Consumer, L&T Technology, JK Cement,

Q: Do you think this is too late to add PSU Banking stocks in the portfolio?

Khemka: While the overall market has been touching new highs PSU banks had sharply underperformed due to slower growth, High NPAs, and lack of capital. However, with the overall recovery in the economy, growth for some of the PSU banks has been improving especially for the large corporate-focused banks.

Further, the disinvestment push from the budget also gave life in few PSU stocks on the hope of privatisation. The FY22 disinvestment target has been set at Rs 1.75 lakh crore. Apart from two PSU banks and one general insurance company, divestments of BPCL, CONCOR, Pawan Hans and Air India is planned to be completed in FY22. The government will create a list of new companies for divestment. The much-awaited IPO of LIC is also slated in FY22. All these measures would boost activity in the capital market and help retail investors participate in the growth of these government-owned marque companies.

Among the most preferred PSU banking stock is SBI. The lender recently reported strong performance in its Q3 results, with healthy NII growth and the strong recovery in retail credit. Its asset quality outlook remains encouraging, with controlled slippages, low restructuring levels and improved Provision coverage. We believe the earnings normalisation cycle for SBI has begun and believed that the stock has huge upside potential even from current levels.