Pankaj Pandey, the head of research at ICICI Securities, believes that in Budget 2024, the government will maintain the fiscal discipline path with a consistent focus on augmenting the capex and manufacturing cycle. In an interview with Mint, Pandey shared his views on current market valuation, the year-end target for Nifty 50 and the prospects of defence and railway stocks.
We remain constructive on the Indian equities. Our optimism is hinged on various factors such as healthy macroeconomic growth (GDP and GST), robust corporate earnings, and stable government with a focused approach to capex and manufacturing.
This, along with the catalyst in the form of a likely rate cut (globally and domestically), makes us positive on the Indian markets.
In general, corporate earnings tend to grow at a rate of nominal GDP growth rate; hence, if our real GDP growth is nearly 7-8 per cent and inflation is stable at nearly 5 per cent, our corporate earnings will likely grow in the range of nearly 12-15 per cent band annually, on a medium to long term which should also translate into similar returns.
Our December 2024 target for Nifty 50 is pegged at 25,000, wherein we have valued the index at 20 times PE (price-to-earnings) ratio on FY26 EPS (earning per share) of ₹1,250, building in 16.3 per cent earnings CAGR over FY23-26E.
From an optical and relative point of view, yes, valuations are on a richer side.
However, in our view, one needs to dissect it in a different manner to understand.
For instance, when comparing large caps to midcaps, one can definitely say that large caps are still reasonably priced vis-à-vis midcaps, which are trading at a reasonable premium.
But that does not imply that all midcaps are frothily priced.
Nonetheless, few midcap pockets are very rich in valuations, and hence, one should navigate those segments with caution.
On the other hand, if we dissect valuations from a sectoral perspective, there might be some sectors which are attractive, like banks (large caps), NBFCs, and a few pockets of consumption, and a few sectors, such as capital goods, PSU, and power might be at the top quartile of valuations.
In a nutshell, we believe an investor must be thorough with what he is buying and what price he is paying for a sustainable growth model and the associated risks; any oversight can cost him dearly if one is venturing into richly valued stocks and sectors.
We believe the government will maintain the fiscal discipline path with a consistent focus on augmenting the capex and manufacturing cycle.
The government will also try to focus on revving up consumption, specifically rural consumption, by allocating more to the social schemes.
From a sectoral perspective, we believe capital goods/infrastructure, power, and financials will remain in the focus as any incremental allocation towards capex may further solidify their outlook in the medium to long term.
Also, consumption-related segments (discretionary/staples) might witness renewed interest as any positive news from Budget and a weak base of previous years might lead to some green shoots in growth prospects.
After the Budget, the market focus will shift to an outlook on interest rates (both global and domestic), corporate earnings, and macroeconomic growth momentum.
If they find focus in the Budget, they could also focus on specific segments of capex and consumption.
Overall, underlying factors such as healthy economic growth, corporate earnings visibility, likely interest cut, and stable government will keep market sentiments sanguine.
From a sectoral perspective, banking looks attractive in the medium to long term, given its lean balance sheet and the majority of bad loan provisioning behind it.
Banks have entered a good credit growth cycle, which, on the one hand, will lead to business growth and provide operating leverage while, on the other hand, leading to strong ROAs (return on assets) going forward.
The capital goods and infra EPC (engineering, procurement, and construction) space seems well placed for growth, with healthy order books, decent margins, a strong focus on balance sheet discipline, and reasonable valuations.
Autois another sector we are bullish on, with the tailwinds from premiumisation play and EV (electric vehicle) adoption at the inflexion point.
IT space earnings and fortune recovery will be a function of recovery in discretionary demand in the US, a key market for all IT majors.
Recent Q1FY25 commentary suggests that there has been no change in outlook, with discretionary demand still being muted.
Nonetheless, the US Fed rate cut in September could revive some of the sentiments regarding demand. We remain selectively positive on the sector.
Over the past one year, defence and railway stocks have done stupendously well on the back of strong order announcements, strong execution and new initiatives and policies announced by the government.
Even the government, in the 2023-24 Budget, allocated more than 50 per cent of the capex towards the above two segments, which led to strong rerating of the stocks throughout FY24.
We believe the valuations are full and rich, which will lead to consolidation in the stocks of these sectors in the medium term.
However, stock-specific action will happen in this sector depending on the magnitude of individual financial performance.
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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.
