How to ride election results-triggered rally on D-Street? Here is what analysts recommend

The Bharatiya Janata Party’s sweeping victory in Madhya Pradesh, Rajasthan and Chhattisgarh last weekend has sent the Nifty Bank soaring to a series of record highs, taking its gains so far this year to 8.8 per cent. Even the Nifty PSU Bank, which tracks stocks of 12 major state-run lenders in the country, has followed suit during this period, delivering an outstanding return of more than 25 per cent.

On Tuesday, the Nifty Bank gained 580.9 points, or 1.3 per cent, to settle at a record 47,012.3, after scaling an all-time high of 47,230.6 in intraday trade. The Nifty PSU Bank added 75.1, or 1.4 per cent, to finish at 5,407.5 while the Nifty Private Bank gained 284.7 points, or 1.2 per cent, to 24,387.1—both record closing highs.  

Dalal Street has given a euphoric response to the outcome of the state polls, with benchmark indices Sensex and Nifty50 soaring to unprecedented levels.  

On Monday, the indices jumped more than two per cent each, boosted by a 3.6 per cent surge in the Nifty Bank.  

What’ s keeping the bulls energised? 

The BJP’s victory in the three states, out of the five states that went into polls last month, solidifies the party’s proreform image, which is likely to benefit it in the longer term, and performance of the economy on various fronts—especially during the COVID-19 period and the gloomy global geoeconomic situation—are testament for the same, said Omkar Kamtekar, Research Analyst at Bonanza Portfolio. 

Since the turn of FY24, midcap and smallcap stocks have outperformed the overall market, giving handsome returns to investors, said Kamtekar. 

Although the valuations appear to be rich at the current juncture, largecap stocks, especially from the banking space, should witness higher incremental inflows going ahead to catch up to the broader market, he added. 

Kamtekar prefers three stocks from the Nifty Bank basket: 

1. HDFC Bank (HDFCBANK) 

Since November 2020, HDFC Bank shares have remained rangebound and delivered a modest return of 13 per cent to investors. However, this seemingly muted performance belies a significant transformation within the banking giant. The reverse merger with HDFC Ltd, a landmark move, has propelled HDFCBANK to become the fourth largest bank globally, consistently achieving an impressive 20 per cent CAGR profit.  

The post-merger integration phase has presented challenges, leading to a temporary dip in growth metrics. The normalisation of NIM and asset quality restoration require a focused approach and strategic maneuvering. Amidst these transitory headwinds, we are confident about the operational excellence, customer-centricity, and prudent risk management that would enable long-term value creation. 

HDFC Bank is available at reasonable valuation, trading at Rs 1,625, and should be a part of the long-term portfolio. 

2. IDFC First Bank (IDFCFB) 

IDFC First Bank has successfully completed the initial phase of its strategic transformation from being an infrastructure finance company to a diversified retail lending institution. This shift aligns with the bank's long-term vision of expanding its reach and catering to a broader customer base. IDFCFB projects its credit card business to achieve operational breakeven by FY25, underscoring its commitment to this segment. Furthermore, the bank is optimistic about achieving a return on equity (ROE) of 13-15 per cent and a return on assets (ROA) of 1.4-1.6 per cent by FY25. These ambitious yet attainable targets reflect the bank's confidence in its strategic direction and its ability to generatesustainable value for its stakeholders. 

Currently, IDFCFB is trading at Rs 89 and available at a fair valuation from the perspective of a long-term investment. 

3. IndusInd Bank (INDUSINDBK) 

INDUSINDBK maintains a robust loan growth guidance of 18-23 per cent, fueled by strong growth in key segments such asvehicle finance, microfinance, mortgages, and the mid/small corporate segment. This growth is being driven by a multi-pronged deposit mobilization strategy that encompasses targeted geographic expansion, cross-selling to home loan, credit card, and microfinance institution customers, leveraging digitalisation to attract new customers, and initiatives to enhance brand visibility. Additionally, INDUSINDBK is poised for further strategic advancementwith the anticipated increase in stake by its promoter entity, IndusInd International Holdings Ltd. Moreover, INDUSINDBK was recently included in the MSCI Global Stand Index.  

Trading at Rs. 1,507, INDUSINDBK has potential to deliver healthy return over the long term since it is available at areasonable price. 

What do technical charts indicate? 

According to Avdhut Bagkar, Derivative and Technical Analyst at Stoxbox, the overall trend in Bank Nifty remains bullish, with support emerging at 46,800.  

“Only a breach of 46,700 could instill a bias of weakness. Overtaking previous crucial hurdles of 46,300-46,500 has triggered fresh upside in the index, which is poised to scale uncharted territories in the coming sessions,” he added. 

Outlook for banking stocks in the near to mid-term 

According to ICICI Securities, it is not possible to have a rising GDP trajectory driven by a capex cycle without a re-leveraging cycle in the economy, hence, large banks may provide maximum alpha as it is yet to show signs of revival and valuations remain reasonable due to skepticism.  

In general, financial services can benefit, wrote analysts at the brokerage in the Strategy report.