Geopolitics, muted earnings growth worrying markets: Sunny Agarwal

Sunny Agarwal of SBI Securities said that going ahead, the financial services sector will lead, which includes banks, both public sector (PSU) and private

Indian markets are currently trading near fair valuations and select mid-and small-caps offer an opportunity to go long, said Sunny Agarwal, head - fundamental research, retail desk at SBI Securities in a telephonic conversation with Abhinav Ranjan. Edited excerpts:

How do you view the current market situation and what sectors you are bullish on amid this volatility?

Indian markets are neither trading at expensive valuations nor at very cheap valuations, but are trading closer to 20–21x price-earnings (PE) multiple, in line with long period average. Compared to the MSCI EM index, India's valuation premium has corrected significantly during the last 15 months and is below the 10-year average.

Going ahead, we believe the financial services sector will lead, which includes banks, both public sector (PSU) and private. They have shown a healthy credit growth trend. The net interest margins are likely to stabilise in a quarter or two. Third, asset quality continues to remain pristine for most banks.

In terms of valuation, PSU banks still appear to be trading at attractive valuations and have favourable credit-deposit (CD) ratio. Within private banks, our preferred investment ideas are ICICI Bank, HDFC Bank, AUF SFB, Federal Bank and Karur Vysya Bank. Among the PSU banks, our preferred picks are Canara Bank, Bank of Maharashtra and Indian Bank.

What about the non-bank finance companies (NBFCs)?

NBFCs get first mover advantage of the rate cut cycle initiated by the Reserve Bank of India (RBI) over the last 13 months. So, they are enjoying an immediate benefit in terms of a lower cost of funds. Among NBFCs, we are bullish on Shriram Finance following the MUFG deal. We also prefer Muthoot Finance (gold finance) and India Shelter (housing loan).

What risks are the markets pricing in right now?

The overhang in terms of the US trade deal is now behind us, and this coupled with multiple free-trade agreements (FTAs), exports should not be an area of concern for the market. The market is worried about frequent geopolitical tensions, whether between the US and Iran or in other parts of the world, which could lead to significant supply-side disruptions. Another overhang was muted FY26E earnings growth, which is likely to witness recovery to the tune of double digit during FY27E.

By when will the foreign outflow from the equity markets stem?

The trade deal announcement has led to some arrests in outflows. With significant underperformance versus the other developed and emerging markets (EMs) coupled with stability in USD-INR, I believe outflows from foreign institutional investors should subside going forward. With euphoria in gold and silver prices coming off, money should start coming back towards equity markets.

Information technology (IT) stocks have seen a significant rout due to AI-related concerns. Is this an overreaction and offers a buying opportunity?

Market doesn’t like uncertainty and hence there is panic in the IT pack. Still, nobody can accurately predict what the impact on the business of IT service providers will be, as their business model is effort-based. With AI coming in, clients may ask for outcome-based pricing rather than effort-based pricing. Maybe 5–10 per cent of effort-based revenue will shift to outcome-based models.

From an earnings perspective, most tier-1 IT companies are likely to deliver revenue growth of 6–7 per cent in FY27E compared to 2–3 per cent seen in FY26, in the backdrop of robust TCV. Due to AI, in the medium-term, there may be deflation and to that extent, street will look forward to further clarity on how IT companies are likely to offset this growth challenges.

Street is worried about growth and not existence. Post the sharp correction, valuations are comfortable in the IT sector. Investors should adopt a strategy of gradual accumulation. Going ahead, maybe in a quarter or two, we will get more clarity on how AI as a business vertical is scaling up and how it can contribute to overall sales and growth.

HCL Tech is one company that can be accumulated from a medium-to-long term perspective. Coforge from the mid-cap space also looks attractive.

How are midcaps placed this year, and can we expect a bounce back?

Valuations have turned comfortable in many mid and small-cap companies after last year's correction. In the third quarter, many mid and small-cap companies, on an aggregate basis, have delivered far better growth compared to their large-cap peers. So, on one hand, because of the stock price correction, valuations have become comfortable. On the other hand, select themes/sectors seem well placed to deliver healthy earnings growth. I think it is a perfect combination for someone looking to invest in these two categories.

Within mid and small caps, we are constructive on defence, structural steel tubes, power ancillary, recycling, financial services, auto ancillary, capital market plays, select chemicals for new age verticals, critical minerals, pharma, EMS etc.

What are your top picks for 6 to 12 months?

Large Cap: ICICI Bank, TVS Motors, M&M, Airtel, Lupin, NAM India, APL Apollo Tubes, BEL, Solar Industries, Indian Hotels, Varun Beverages and Swiggy. Mid/Small cap: Pricol, SJS Enterprises, IMFA, Privi Speciality Chemicals, CCL Products, Lumax Auto, Pondy Oxide, Carysil, Goodluck India, Syrmma, Time Technoplast and Sudeep Pharma.   ===============================

Disclaimer: View and outlook shared belong to the respective brokerages/analysts and are not endorsed by Business Standard. Readers' discretion is advised.