Brokerages pick banks, infra and telecom for 2023 play; IT, metals may drag

Banks are the top pick of brokerages for 2023, notwithstanding a sharp run up in these stocks in 2022. Their optimism is based on expectations of double-digit loan growth, a decade-high net interest margin (NIM) and low probability of material deterioration in asset quality of banks.

"For banks, our analysts are factoring in loan growth of mid-teen -to high-teen in the 2023 financial year (FY23) to FY25, with an acceleration in growth over the period. The expectation on net interest margin is the highest and credit cost estimate is the lowest in over a decade," Nomura said in a report.

"Rising short-term rates, higher credit growth, and peaking credit costs imply outperformance for financials," said Morgan Stanley.

Motilal Oswal and Axis Securities also have an 'overweight' stance on the sector.

The banking sector was a standout performer in 2022 with the Nifty PSU Bank rallying almost 70 per cent and Nifty Bank surging 22 per cent (as on December 29).

Infrastructure is another sector with a positive outlook. Brokerages cite a pick-up in government capex spending in select segments, strong order books and lower commodity prices as tailwinds.

Similarly, they expect the telecom sector to continue outperformance on the back of higher realisation and low risk to earnings.

The brokerages are on the fence when it comes to automobiles and the consumer discretionary sector. They see the rising per capita income, availability of finance, and companies being able to successfully pass on the higher costs to consumers as key drivers for revenue and profit growth.

Nomura has an 'underweight' stance on the two sectors, based on expensive valuations and their high susceptibility to growth slowdown.

"The valuations of consumer discretionary and autos are decisively higher than pre-Covid-19 levels. The sector earnings are supported by recovery in demand after Covid-19 and lower commodity prices. The sector is highly susceptible to economic growth slowdown. We think earnings estimates and valuation multiples are at risk," the brokerage said.

The sectors with neutral or negative ratings from most of the brokerages for 2023 are information technology (IT), healthcare, metals and energy. For the IT sector, analysts cite slowdown in global tech demand and elevated valuations compared to pre-Covid-19 levels.

Overall, they said that domestic sectors with low sensitivity to global economic slowdown are likely to do well in the next year.