As the US Fed looks set to kick start the interest rate easing cycle, the stock market’s reaction will hinge on whether these cuts are perceived as a proactive boost for growth or a response to looming recession risks, said Ajit Mishra - SVP, Research, Religare Broking Ltd. In an interview to Amit Mudgill of Business Today Markets, Mishra said he prefers State Bank of India and LIC among PSU stocks and would bet on pockets such as private banking and energy in an event of correction. Edited excerpts:
The US Fed rate cut cycle is here. How should domestic investors read it? Should one worry over the possibility of a recession in the US?
As the US Federal Reserve prepares to initiate a rate cut cycle, driven by easing inflation concerns and signs of economic slowdown, the global economic landscape is set for significant shifts. With the US accounting for nearly one-fourth of global GDP, its deceleration is bound to impact worldwide growth, and India will not be immune. Market reactions will hinge on whether these cuts are perceived as a proactive boost for growth or a response to looming recession risks.
Given the ongoing possibility of a US recession amid mixed economic data, investors must remain cautious, diversify their portfolios, and keep a close watch on key economic indicators. As the US adjusts its monetary policy, emerging markets like India could see changes in investment flows, trade dynamics, and overall economic sentiment. This interconnectedness highlights the need for Indian policymakers and investors to stay alert to US economic developments and their potential ripple effects on India’s growth trajectory.
Indian market valuations do look rich. Nifty profit growth in Q1 was muted, uninspiring. Do you think investors should wait for a correction, before infusing fresh money?
Nifty's profit growth in Q1 FY2025 was subdued at just 4 per cent YoY, marking the slowest pace since the Covid-19 lockdown period. Currently, the index is trading at a trailing price-to-earnings ratio of 23.1 times, slightly above its long-term median of 21.8x, reflecting elevated valuations in certain areas. While an intermediate correction cannot be ruled out, market timing remains difficult, making a staggered investment approach more suitable in the current environment. Investors should prioritize long-term strategies and diversify their portfolios to manage potential volatility in the future.
If there is any correction due to slowdown in the domestic earnings or global developments, where should investors invest?
Private banks offer a compelling investment opportunity, particularly in the event of a market correction. In recent years, large private banks have underperformed relative to the Nifty due to various concerns, resulting in attractive valuations with substantial upside potential. Meanwhile, the energy sector remains strong, backed by solid growth prospects and long-term sustainability from the global shift toward renewable energy. With rising investments in solar and wind power, driven by government initiatives, this sector is well-positioned for growth. Investors can selectively target opportunities in both the private banking and energy sectors during market corrections.
Name three Nifty stocks that you are betting on and why?
Within our coverage universe, we see potential in three Nifty stocks: IndusInd Bank, Bajaj Finance, and Titan Company, as each presenting compelling growth opportunities in their respective sectors.
IndusInd Bank Ltd stands out with consistent loan growth outpacing the industry, healthy deposit growth driven by term deposits, and robust asset quality. As the cost of funds stabilizes, the bank's margins are expected to improve. Valued at 1.7x its FY26E adjusted book value, with a target price of Rs 1,757, IndusInd is well-positioned for continued growth through its focus on granular businesses and digital initiatives.
In the NBFC space, Bajaj Finance Ltd is a leading player with a strong pan-India presence and one of the lowest GNPA and NNPA ratios in the industry. The company excels in AUM growth and is expected to stabilise margins from Q2 FY25 as the AUM mix normalises. We maintain a Buy rating with a target price of Rs 8,747, valuing Bajaj Finance at 5.4x its FY26E adjusted book value.
Titan Company Ltd is a prominent player in the jewellery sector with an 8 per cent market share while expanding into lifestyle segments like watches and eye care. The company aims for a 20 per cent CAGR growth in jewellery through store expansion, targeting 12 per cent EBIT margins. We anticipate revenue, EBITDA, and PAT to grow at CAGRs of 21.5 per cent, 28 per cent, and 28.9 per cent over FY24-26E, respectively, maintaining a Buy rating with a target price of Rs 4,270.
Which sectors are you bullish or bearish on and why? Name a few stocks that may turn buying opportunities on corrections.
In addition to banking and energy, the NBFC sector presents a bullish opportunity in the current market landscape as central banks globally begin cutting rates. The NBFC sector stands to benefit from rate cuts because many have a substantial portion of fixed-rate loans in their portfolios. As interest rates decline, their funding costs can decrease without an immediate impact on loan pricing, boosting net interest margins (NIMs). This reduction in the cost of funds allows NBFCs to enhance profitability while maintaining competitive lending rates. In this space, stocks like Bajaj Finance and L&T Finance are worth monitoring.
Meanwhile, sectors such as defense, railways, and capital goods are trading at high valuations driven by expectations of strong earnings growth. Investors should exercise caution, as any shortfall in these expectations could negatively affect valuations.
One cannot paint all PSU stocks with the same brush. Name a few PSU that you have 'Buy' calls? Can you share your target prices and rationale behind your bullish views?
The PSU basket has experienced an exceptional run in recent years, and many stocks are now undergoing a correction, which is natural and likely to continue. However, from the list of PSU stocks in our coverage, investors may consider accumulating SBI and LIC.
1. State Bank of India (SBI): As India's largest PSU bank, SBI holds a significant market share of approximately 19 per cent in advances and 23 per cent in deposits. In Q1 FY25, the bank reported a net interest income growth of 5.7 per cent YoY to Rs 41,126 crore, despite a slight decline in margins. With expected credit growth of 13-15 per cent in FY25 and improving asset quality across segments, we maintain a Buy rating with a target price of Rs 941. The bank's strong fundamentals and strategic focus on managing deposit costs position it well for sustained growth.
Life Insurance Corporation of India (LIC): As the largest insurance provider in India, LIC commands a dominant market share of 64.02 per cent in new business premiums. The company reported a net premium income growth of 15.7 per cent YoY to Rs 1.14 lakh crore in Q1 FY25, driven by a significant increase in single premiums. With plans to diversify its product offerings and expand its distribution channels, we have a Buy rating on LIC with a target price of Rs 1,285. The company's robust market position and ongoing product innovations support its growth trajectory.