Amid the ongoing correction in the domestic equity markets, brokerage Emkay Global Financial Services believes it is a good time to start zeroing in on stocks where valuations are now reasonable. It also thinks that the RBI’s injection of Rs 60,000 crore of liquidity is a strong statement of intent, even though it covers only 20% of the existing shortage of Rs 2.9 lakh crore.
The Reserve Bank of India, on January 27, announced OMO purchase auctions of Government of India securities for an amount of Rs 60,000 crore in three tranches of Rs 20,000 crore each, to be held on January 30, 2025, February 13, 2025, and February 20, 2025.
“This is a more important move than an actual rate cut (now expected in 25 Feb), as market rates respond immediately, and a rate cut without a liquidity injection is ineffective. The market reaction has been muted so far, with yields rallying by 5-10 basis points at the short-end, but by around 2-3 bps at the long-end, given that the system is still net-deficit. However, we see a strong rally at the short-end as the RBI takes more steps to address the tight liquidity,” Emkay Global Financial said.
Following the announcement, the benchmark equity index BSE Sensex closed 535 points, or 0.71%, higher at 75,901 on January 28.
“A turn in the liquidity cycle is a strong stimulant for domestic equities, and BFSI is the best way to play this in the short term,” Emkay Global Financial Services said.
The brokerage further added that the third quarter earnings season has been uninspiring so far, but this was baked into estimates, and forward earnings downgrades have been stemmed. The Nifty EPS has held up at Rs 1,043 and Rs 1,202 for FY25 and FY26, respectively.
“Midcap and smallcap price-to-earnings (P/E) are still elevated but have corrected 17.8% and 17.2% from the peak and are now at 37.3x and 29.8x, respectively (trailing 12 months).
While sharing its list of top picks for 2025, the brokerage suggested Zomato, Lupin and Tata Motors in the large cap space. On the other hand, it prefers IndusInd Bank, Escorts and One97 Communications in the midcap space and StoveKraft, Metropolis Healthcare, and Quess Corp in the smallcap space.