EXCLUSIVE | IT stocks' valuations not cheap, could turn out to be laggards in 18-24 months: Gaurav Dua, Sharekhan

Stock Market Expert View: The mid-cap and small-cap indices are still 10-15 per cent away from their all-time high levels and hence offer a lot of bottom-up stock-picking opportunities, says Gaurav Dua, Head – Capital Market Strategy, Sharekhan by BNP Paribas, in an exclusive interaction with Zee Business' Swati Verma. However, Dua advises, it would be wise to focus on quality rather than chase momentum or speculative stocks.
 
Further, Dua notes that IT services stocks have bounced back from oversold territory, but they are unlikely to sustain the uptrend in the next few quarters because of the uncertain demand environment. Also, the valuations are not cheap given the muted growth expectations for FY 2024–25, the analyst opines.
 
Below are the edited excerpts -
 
What's your view on the current market? Are you comfortable with the valuations?
 
Nifty has consolidated in a broader range of 2,000 points within 16,000–18,000 levels for close to 20–22 months now. The time correction has led to valuation multiples coming down from the heady levels of 25x one-year forward earnings to around 18.5x now, which is at a slight premium to long-term average valuation multiples. Additionally, the Indian market premium to MSCI China and MSCI Asia (ex-Japan) has also normalised towards the long-term average level. Hence, we are not too concerned about valuation at the Nifty level.
 
However, the scenario is different in the case of broader markets, where the mid-cap and small-cap indices are still 10-15 per cent away from their all-time high levels and offer a lot of bottom-up stock-picking opportunities. But it would be wise to focus on quality rather than chase momentum or speculative stocks.
 
What are the factors (both micro and macro and domestic and global) that will influence equities going ahead?
 
On the domestic side, the progress of the monsoons and the trend in consumer spending are immediate data points to watch out for by investors. Globally, the recent data also indicates that the aggressive rate hikes are beginning to manifest in a possible recession in some of the large economies in Europe. Recently, German economic growth has turned negative, and other countries could follow suit. The extent of the slowdown (soft or hard landing) and the monetary policy response to the same would influence the market direction in the coming months or quarters.
 
The earnings season is on its last legs. What's your takeaway from the March quarter numbers? Also, your estimate for FY24 Nifty earnings.
 
Despite the tough macro environment, earnings season has been largely in line with expectations and the consensus estimates for FY2024 Nifty earnings have not seen any material downgrades. In terms of demand outlook, the overall commentary by most companies is encouraging, excluding some export-oriented businesses or rural demand-driven businesses.
 
Public sector banks' total profit crossed Rs 1 lakh crore mark in FY23. Your views on the same
 
With the NPA cycle behind us and healthy credit growth supporting the core business, the quarterly results of PSU banks have seen a dramatic reversal in the past few quarters. Accordingly, the PSU bank stocks have also seen substantial re-ratings in the past 12–15 months. Hence, we believe it is time to be selective in the PSU bank space now. Especially since the net interest margins (NIMs) could come under pressure in FY2024. Besides, there is a regulatory overhang related to possible guidelines on expected credit loss (ECL) provisioning that could result in a spike in NPAs, leading to additional provisioning requirements and the possible raising of equity capital by some of the PSU banks. Over the next 12–18 months, we believe that financials (NBFCs) can outperform PSU banks. NBFCs would benefit from a reversal in interest rates and better growth in some of the segments like mortgage loans, consumer loans, and MSME loans.
 
What's your view on the Indian IT sector? Is artificial intelligence going to be the game changer? Your top picks, if any
 
Indian IT companies have bounced back from oversold conditions lately. We do not expect the uptrend to sustain in the next few quarters. That’s because of the uncertain demand environment against the backdrop of the expected recession in many developing economies. Also, the valuations are not cheap given the muted growth expectations for FY2024–25 and the pressure on margins. Specific to AI, we think it can be a threat and also an enabler for Indian IT services companies, depending on their ability to adapt and realign the business model.
 
New-age companies such as Zomato, Nykaa, and Paytm fared better in Q4. Will you suggest long-term investors bet on these stocks now?
 
Some of the new-age companies have bounced back smartly on the back of narrowing losses on their books (even ahead of guidance in some cases), along with positive sentimental rub-offs from the upsurge in Nasdaq and new-age companies in US markets. We do not cover any of the recently listed new-age companies. We prefer to play the upside through Infoedge, which has interests in various new-age businesses in India.
 
Please suggest the sectors in which you are overweight and underweight.
 
As an investor with an investment horizon of 18–24 months, we believe that private sector banks, NBFCs, auto and auto ancillary companies, engineering and capital goods companies, and select consumer and building material companies should outperform. On the other hand, we believe that energy, metals, and IT services could turn out to be laggards in the same period.