News

Published: October 29, 2024
Updated: October 29, 2024

Samvat 2081: Are Defence and Railway PSU Stocks Ready for a Rebound? Diwali Picks for Nifty and Small Cap Investors

Markets Set High Benchmarks Ahead of Samvat 2081

The last 18 months have seen remarkable performance in India’s stock markets, with the Sensex and Nifty each climbing nearly 50% and broader indices soaring over 70%. Given this strong run, investors are now advised to moderate their expectations. Sachin Shah, Executive Director and Fund Manager at Emkay Investment Managers, suggests a realistic approach as the new Samvat begins, with returns likely to reflect an earnings growth of 12-20% over the coming year.

Reasonable Valuations but Limited Room for Re-Rating

According to Shah, many stocks now trade at reasonable price-to-earnings (PE) multiples, leaving little space for significant re-ratings. He projects that the Sensex could range between 90,000 and 95,000, with the Nifty expected to trade within the 27,500-29,000 band. Retail investor sentiment has remained resilient, fueled by consistent investments through mutual funds, online brokerage platforms, and savings schemes like the NPS.

Resilience Amid Global and Political Challenges

Despite geopolitical tensions, including the Russia-Ukraine conflict and recent Middle Eastern conflicts, Indian retail investor confidence has remained strong. Shah highlights that retail investors are undeterred, suggesting an underlying optimism and stability in market sentiment, which he believes will continue through the new Samvat.

Smallcap Stocks with Growth Potential

Shah is optimistic about sectors such as Contract Research and Manufacturing (CRAMS), auto-ancillaries, and private banking, where companies are benefitting from global shifts in supply chains. Notable smallcap picks include Laurus Labs, GMM Pfaudler, and Igarashi Motors, which are poised to gain as international firms seek alternatives to Chinese suppliers. Federal Bank also stands out in the private banking space as a preferred choice among mid-sized players.

Sectors Expected to Outperform

Among Nifty stocks, Shah expects strong performance from private sector banking, IT, pharmaceuticals, and selective auto stocks. Leaders in these sectors, including HDFC Bank, ICICI Bank, Infosys, HCL Technologies, and Sun Pharma, have already delivered results exceeding expectations. In autos, Maruti and Eicher Motors are well-positioned to benefit from premiumization trends.

Private Banking: Positioned for Growth

Shah notes that large private sector banks like HDFC Bank are now trading at reasonable valuations after a period of underperformance. These banks’ strong deposit franchises and resilient asset quality have begun to positively impact their results, indicating further growth potential.

PSU Rally’s Momentum Tapers Off

The past two years have seen a significant rally in defence, railway, and other PSU stocks, driven largely by undervaluation. With these depressed valuations now corrected, Shah believes a near-term rally will depend on strong earnings growth. Without it, a quick rebound in PSU stock prices may be unlikely.

Foreign Portfolio Investors: Will Outflows Ease?

Foreign portfolio investors (FPIs) have been net buyers in 2024, investing Rs 2 lakh crore in the first nine months. However, October saw heavy selling as FPIs offloaded nearly Rs 1.2 lakh crore, effectively reversing 60% of their earlier purchases. Shah believes this could indicate the end of high-intensity FII selling. As Samvat 2081 begins, investors may need to moderate their expectations following the recent surge in the markets. Key opportunities exist within smallcaps and select sectors like private banking, IT, and auto. Accordingly, Indian markets may see continued resilience, with returns likely mirroring steady earnings growth across chosen sectors.