PSU stocks not very expensive, but private banks more favourable, says BNP Paribas’ Head of India Equities

The outlook for India for FY25 remains favourable on most parameters, but index returns may be relatively muted. For end-2024, we have a Nifty target of 23,500, which presents a high single-digit upside potential. This may not look like a big number, but it is on top of a 20 per cent jump over the past year. Some of these returns may be front-loaded because the main catalyst is the General Elections within the first half of the year. India usually tends to see pre-election rallies based on historical experience.

The macro-environment seems favourable with inflation easing. For the US, BNPP Exane economists expect 4 rate cuts in 2024 and a soft landing. India’s inclusion in global bond indices may support bond yields, too. In terms of underlying fundamentals, India has seen double-digit earnings growth with minimal consensus downgrades in recent quarters.

However, valuations are now elevated. In particular, the expanded bond-earnings yield gap indicates muted returns from here, as historically, this has been a reliable leading indicator. The other concern is that the recovery has not been broad-based, with mass-consumption categories still under pressure.

The recently concluded State elections have eased some concerns about policy continuity. However, any upsets could spur volatility and present a risk to equity markets.

After witnessing strong inflows during December 2023, FIIs turned net sellers in January. However, FY24-YTD, inflows from FII remain at $21 billion, the highest among emerging markets. Last year, too, we witnessed a similar trend of FII pulling out in January and February; however as risk-reward started turning favourable, we saw a strong resurgence of FII flows. Given the resilience India presented, a similar trend cannot be ruled out.

While the macro picture continues to remain resilient, risks include the timing of Fed rate cuts, any hiccup in the upcoming Lok Sabha elections, resurgence of inflation and escalation of geo-political issues, and an economic revival in China, which could lead to continued outflows from India. Of these, the direction of Fed fund rates remains the key monitorable, going forward.

Several PSU companies have been turning around quite smartly over the past few years. By and large, PSU stocks are not very expensive either; for example, PSU banks. But they also do not have the same performance track record over cycles as their private peers. Within banks, we continue to prefer private banks, given their more favourable risk-reward scenario.

The strength in the Indian economy has been reflected in the prices. However, there are certain pockets where valuations seem to be reasonable. We continue to prefer growth at a reasonable valuation and therefore prefer private banks, select capex plays, IT and telecoms and are underweight on staples, automobiles, and pharma. The recent correction in private banks makes them even more attractive. Additionally, we expect IT services growth to recover and expect telcos to benefit from tariff hikes. Within the capex theme, we like companies within the power segment, especially in transmission, as long-term growth plays.