Indian equity markets are experiencing a notable shift in momentum, driven by strong performance in public sector banks and capital goods companies. This rally, extending into its third session as of , signals a potential re-evaluation of these sectors by investors, according to market analysts.
PSU Banks Close Valuation Gap
Public sector undertaking (PSU) banks are at the forefront of this market upswing, outperforming their private sector counterparts in recent days. Dipan Mehta, Director of Elixir Equities, notes that PSU banks are “closing a multi-decade gap with private sector banks in both valuations and performance.” This turnaround is attributed to improved balance sheet quality, a return to growth mode, and recognition by investors of the progress made by these institutions.
Historically, private sector banks enjoyed a significant premium in terms of market share and growth rates. However, Mehta points out that PSU banks are now “giving private sector banks a run for their money,” challenging the previous dominance. While a valuation gap remains, the narrowing of this disparity suggests a sustained period of re-rating for PSU banks is likely. A key challenge, however, will be maintaining current net interest margins (NIMs) in an increasingly competitive banking environment.
The Nifty PSU Bank index reached a record high of 9,647 on , with all 12 constituent stocks posting gains. Punjab National Bank led the charge, jumping 3.15%, while other significant movers included Indian Overseas Bank, Union Bank of India, and Bank of Maharashtra. Several banks, including Bank of Maharashtra, Union Bank of India, Indian Bank, and Bank of India, hit fresh 52-week highs during the session. State Bank of India, while also experiencing gains, saw a more modest increase of 0.21% to ₹1,216 per share.
Capex Cycle Fuels Capital Goods Sector
Alongside the strength in PSU banks, the capital goods sector is also experiencing an upward trajectory, fueled by robust order books and a sustained capital expenditure (capex) cycle. Mehta emphasizes that execution remains the biggest risk for companies in this sector, noting that delays can occur not only within the manufacturing process but also on the customer side. Despite this risk, the outlook for capital goods firms remains positive.
Companies are currently benefiting from “record order book positions” and “great earning visibility for the next two to three years,” with valuations remaining reasonable. Mehta specifically highlights companies with diversified revenue streams, such as Larsen & Toubro (L&T) and KEC International, which derive a significant portion of their revenue from overseas projects. L&T, in particular, is favored due to its ability to handle complex projects within India and its diversified order base, with approximately 40-50% of revenues originating from outside the country.
Cautious Outlook for FMCG, Opportunities in Infrastructure
In contrast to the positive outlook for banking and capital goods, Mehta expresses caution regarding the Fast-Moving Consumer Goods (FMCG) sector. He suggests that many FMCG stocks are failing to meet his firm’s benchmark for growth – a topline growth rate exceeding nominal GDP growth (approximately 11%). He specifically cites Dabur as an example, stating that he has a “negative” view on the stock and recommends investors diversify away from the FMCG sector.
Conversely, Mehta identifies opportunities within the infrastructure and engineering sectors, particularly for companies with large and diversified order books. He reiterates his preference for L&T, citing its unique capabilities and strong position in the Indian market. He also points to VA Tech Wabag, a company focused on water projects, and various power equipment companies involved in renewable energy and electric distribution as potential investment opportunities.
Wires and Cables Sector Shows Resilience
The wires and cable sector is also demonstrating resilience, with companies consistently delivering strong quarterly performance despite rising copper prices. These companies have been able to pass on price increases to customers and improve their margins, benefiting from established brands and increasing demand driven by renewable energy projects, industrialization, and the growth of data centers. However, Mehta cautions that valuations in this sector are “very rich,” trading at price-to-earnings ratios of 40 to 60 times, making it less attractive for new investment.
Broader Market Context
The rally in PSU banks and capital goods is occurring against a backdrop of broader market stability. According to a report from , India is positioned as a “beacon of stability” in a fragmented global economy, benefiting from macroeconomic stability, fiscal discipline, and a strong domestic demand base. This favorable environment is attracting global partners and fueling a durable growth runway, particularly in real estate and power sectors. However, experts advise caution, noting resistance levels for the Nifty around 25,770 and potential downside towards 25,300, suggesting a need for selective investment strategies focused on value and momentum stocks.
