Stock market last week: A tale of investor enthusiasm, earnings realities, and sectoral resurgence


The domestic stock market had rallied by about 8% between June and July in anticipation of good corporate earnings. The Nifty50 index surged to an impressive peak of 19,991.85 on July 20. However, this enthusiasm encountered a temporary setback during the concluding phase of the Q1 result cycle, as a few prominent blue-chip companies delivered muted results. Consequently, there was a downward revision in the future earnings, impacting investor sentiment. To date, Nifty50 has corrected by about 2.8% from its recent high. The season began with a plus 20% earnings growth forecast for Nifty50, but a 3-4% downgrade followed. Yet, actual earnings growth stands to be healthy at 17%, showcasing India’s business resurgence amidst global challenges, deserving acknowledgment.

Pharma stocks boost

One among the highlighted sectors is pharma, which exhibits favourable trends. While recent results align, the outlook has notably improved, elevating prices & valuation. Business growth was weak during the post-COVID periods of FY22 & FY23, and price erosion in the US pharma sector intensified the feeble performance. Now, the price erosion is believed to be over and is expected to bring back growth in realization for Indian players. As the ease in USFDA approvals during the year substantiates a reduction in operational risk and increases future business demand. Lower chemical raw material costs uplift EBITDA margins for formulation firms. A robust 1–3 year earnings outlook prompts pharma’s appeal, buoyed by stable forex revenue even if there are defensive market shifts. 

However, in the short-term, the valuations have rapidly jumped to 15% above the long-term, which can affect the performance in the near-term. It is also a contra bet because a large block of the revenue comes from developed nations, which are undergoing a recession. The stocks on which we have a positive view are Lupin, Natco Pharma, and Granules.

PSU Bank Q1 performance

Secondly, is to highlight the performance of PSBs and small banks in the finance sector. The PAT growth of PSU banks was robust, doubling compared to Q1 FY23. The key triggers were strong advance growth, margin expansion, treasury gains, and low credit costs due to improved asset quality. Most PSU banks reported mid-teen loan growth YoY, with sequential growth being relatively flat due to seasonal factors. Net Interest Income broadly declined QoQ as margins witnessed compression due to the increasing cost of funds. We anticipate this compression to persist for a few more quarters, but credit growth, which remains strong, will help mitigate the impact. 

Importantly, PSU Banks continued to showcase improvements in asset quality compared to the previous quarter, which will bring down credit costs. The basket of PSU Bank continues to trade below the 1x 1yr forward P/B at 0.86x, which is 30% above the 5-year average of 0.65x. We presume the valuation is appealing on a short-term basis as PSUB continues to improve the asset quality, justifying re-rating. We hold a positive stance on State Bank of India (SBI) and Bank of Baroda (BoB) on a long-term basis.

Small Finance Banks, too, witnessed a strong rally due to sustained credit demand, especially from the MSME space, business expansion, and a lower base. However, significant margin contraction was experienced during the quarter due to deposit repricing, and this trend is expected to persist in the upcoming quarters. Although ROA remains strong due to lower provisioning on improved asset quality, margin compression and a high Cost-to-Income ratio could impact earnings growth in the near-term. However, SFBs are continuing their investments in geographical expansion, technological advancement, and new product development. Given the enhanced asset quality and positive business outlook with reasonable valuation, we have a positive view on SFBs, particularly highlighting rural & semi-rural focused entities such as AU Small Finance, Bandhan Bank, and Ujjivan Small.

The author, Vinod Nair is Head of Research at Geojit Financial Services

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.


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Updated: 13 Aug 2023, 10:05 AM IST

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