Bank of America Securities is overweight on financials, industrials, staples and cement, head of India equity research Amish Shah said at a media roundtable. However, investors should rotate out of staples and cement in six months, he added.
“In the cement sector, there is good demand visibility for the next few months till Q2FY24, when the seasonally weak quarter begins,” said Shah.
He said Budget 2023 will create many opportunities, with subsidies expected for infrastructure schemes including Pradhan Mantri Awas Yojana and rural employment guarantee projects. These subsidies eventually lead to creation of an asset, so they are as good as capital expenditure, he explained.
Staples are expected to do well as rural sentiment is slowly turning the corner.
“All factors for a bounce-back in demand are lining up, like moderating of inflation and increase in non-farm income,” he said.
Foreign institutional investors and domestic mutual funds are materially underweight on staples versus their historical averages. Thus, the sector could see greater inflows in 2023, BofA Securities said.
Another good defensive bet, according to Shah, is the utilities sector.
“Reforms that are currently in the draft stage which propose privatisation of power distribution operations could be a game-changer,” he said.
Valuations are undemanding, with one-year forward price-to-book ratio at 1.4x.
BofA Securities is underweight on the information technology, automobile and healthcare sectors.
“21 percent of the Nifty is export-linked and these sectors will see the sharpest earnings cut,” said Shah.
The firm expects the earnings cut for the automobile sector to be 79 percent, the highest. Healthcare will likely get a 19 percent cut and IT 14 percent.
“Despite heavy outflows, FII positioning still remains slightly overweight on the IT sector and this has potential to reduce further. Valuations at 24x versus an average of 19x don’t give us any comfort,” he said.
The bottom line is India will outperform developed market equities but will underperform emerging markets next year. With India’s structural story intact, financials and industrials will be good long-term bets, said Shah.
“There could be some contraction in net interest margins as the competition for deposits takes off amid banks. But there is good visibility on earnings and strong asset quality,” he explained.
The recent run-up in public sector banks is not keeping BofA at bay.
“The stocks are still trading below their book value and there is more steam left,” he said.
BofA Securities’ pecking order in the financials space is private and public sector banks over insurance companies. Non-banking financiers come last in the list. It has ‘buy’ ratings on HDFC Bank and ICICI Bank.
Industrials is another multi-year bet, according to BofA Securities. Apart from the capex upcycle, underweight positioning of FIIs and current valuations at 22x (versus 26x at peak cycle) give analysts some comfort. Larsen & Toubro, Bharat Electronics, and Adani Ports are the top ‘buy’ calls in the sector.
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