Banking sector looks good from a valuation perspective, says Jefferies

So, a lot of factors are aligning for Indian markets to do well, from the medium to long-term perspective. From a near-term perspective, there are always some challenges, especially now, because, the markets have had a decent run already, global markets as well. We seem to be taking some breather, the global yields have hiked, have gone up quite a lot, the Indian yields have also gone up. So, to that extent the risk-free rates are gone up.

So, I think from a near-term perspective, maybe from a three to six-month, the market could be range bound. But if one is looking at medium term, well, 12-24 month, kind of a perspective, maybe longer, things are looking pretty good, I would say.

A: I think the laragecap banks definitely appear to be very attractive, I would say they have looked attractive from the valuation standpoint and from the fundamental standpoint as well. In fact, I would highlight banking sector as the only sector, which is trading currently at average valuations compared to its history, most other sectors are trading well above. So from that point of view, not as the fundamental but from the valuation standpoint as well, the banking sector is looking good.

The only issue with the sector is over ownership, most of the large foreign fund houses as well as domestic fund houses seems to be owning a lot of banks already. So that's the only challenge. But yes, I would agree with you many of these large private banks, including the PSU banks appear to be quite attractively positioned, in my view.

Also, it's a great way to play the capex cycle as well, because we are seeing credit growth holding up quite strong and that's primarily due to incremental positive trends that we are seeing on the project loan side, so banks definitely is.

On the IT side, I would say it would be good to look at it from a near-term practical standpoint, as I mentioned earlier, mainly from the near-term perspective, the market could just be range bound, and maybe from that perspective IT sector could deliver outperformance here. But I would view it as a near-term tactical buying opportunity, and not really something that I would look at, at least at this point in time from a longer-term perspective, because the issues in the US economy are still very much there.

While the growth is surprising on positive for the last couple of quarters, but eventually, when I feel that there is going to be an inevitable slowdown, maybe visible at the beginning CY24, late CY23. So I would say the IT sector is good to look at from a near-term perspective. But it's still not a buy-and-hold for us from a long-term perspective.

A: Yes, price hikes are coming through. But I would say at the same time the input prices are also going up. So when we look at margins, we don't really get a comfort, on the margin perspective. So yeah, so I would still like to be on the side-lines for that sector.

A: If you look at the broader cap goods and infra sector and it's a sector that obviously we have been very, very positive about, and continue to be positive. I think India, as a whole has just entered the capex sub-cycle. And I think it's a cycle that is usually going to last for at least another four or five years in my view. So a lot of stocks in the sector, the cap goods, infra and I would say, the broader capex sector, the investment cycle play are going to deliver excellent returns, in my view. The one thing that I want to highlight is that, when you look at the capex cycle play or the investment cycle play there is actually a dearth of stock ideas, especially in the largecap names. I mean there are a couple of largecap names here but that's it. And then if you want to play the investment upcycle, you really have to go down into the midcap space.

In the midcap space, obviously, there are a whole bunch of ideas. And my sense is that different investors are going to take a different view about the various sub-segments that you're talking about. But by and large, given the fact that there is a dearth of ideas at the largecap space, I think many of these midcaps and smallcap, sub-sectors will do very well. You mentioned roads, but I would say, even the contractors, the capital goods, the equipment makers, defence, so there are a whole bunch of these stocks in the midcap and smallcap space, particularly, which should deliver excellent returns, in my view.

Maybe from the near-term perspective, as I mentioned, given that the yields have gone up and given them the fact that the inflation has surprised on the upside, maybe from the near term perspective, there could be some challenges, but I would actually use any of these dips to bind to these names, all these sub-segments, cables, wires, etc., as well.

And I would not really get bogged down by what the current PE multiples or the current valuations are, many of these stocks are trading at well above their historical trading ranges. But as I mentioned earlier, we are seeing the capex upcycle in India, for the first time in the last, I would say 12-15 years. Many investors haven't really seen the capex cycle in India and how the stocks typically react in that kind of environment. So, I will not get bogged down by above-average valuations seen in multiple sub-sectors within the broader cap goods/infra space.

A: I will not be able to comment on an individual stock, but at a broader industry level yes, it's a big company that is entering into this space. My sense is that it is going to take some time for any new company, no matter what kind of muscle power that you are coming with, it is going to take some time for the company to establish itself and show meaningful impact in various sub-sectors that you mentioned. I think eventually it will.

But my sense also is that the Indian financial sector is growing, it is severely under-penetrated at this point in time. If you take a five or 10-year view, I definitely see that there is enough space for more than two or three large NBFC players to be present in this segment. I mean, we have seen so many large banks, right? So, it's not necessarily that one large they are entering will disrupt the existing companies in a meaningful way. They will obviously have to kind of gear up for sure. But whether I will just be in a hurry to sell my existing holdings in the NBFC space, the answer is no, because the space itself is growing and existing companies are also innovating.