Why PSU Banks and Capital Goods Are Leading the Stock Market Gains

PSU banks and capital goods are currently the top performers in the stock market, showing stronger gains than many other sectors.
By Newsroom | Finance, Business |

Market expert Dipan Mehta points to Public Sector Undertaking (PSU) banks and capital goods sectors as strong performers, while expressing caution on others. The current market shows a clear preference for specific sectors, with PSU banks outperforming private lenders and capital goods companies demonstrating upward trends. This observation comes amid broader market movements and investor sentiment.

Context

Investor focus has shifted towards sectors offering higher growth and more attractive valuations. Dipan Mehta, Director at Elixir Equities, has highlighted PSU banks and capital goods as key areas of interest. This comes at a time when other sectors, including certain private sector banks and the IT industry, are facing challenges or showing slower growth.

  • PSU Banks Performance: These banks are noted for having growth dynamics comparable to or exceeding private banks.

  • Capital Goods Sector: Companies within this sector, such as BHEL, are showing an upward trajectory, with execution being a crucial factor. The wires and cable space has also reported strong quarterly results, even with rising copper prices.

  • IT Sector Caution: Mehta has expressed a less optimistic view on the broader IT sector, with some exceptions like Coforge, Persistent Systems, and Newgen Software, which are performing well in niche areas. However, he sees better prospects in other selective midcap IT names.

  • Metals Sector: The metals sector is an area where Mehta currently remains cautious.

Evidence and Market Sentiment

Analysis of market trends and expert commentary provides insights into the current sector performance.

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  • PSU Bank Outperformance: Mehta stated that PSU banks' internal growth dynamics are "now equal to or better than private banks."

  • IT Sector Challenges: For KPIT, a specific IT company, its growth is being impacted, according to Mehta. He noted that "other selective midcap IT names" might offer better prospects.

  • Capital Goods and Wires: Mehta emphasized the "significance of execution" for capital goods companies. He also observed "strong quarterly performance" in the wires and cable space.

  • Valuation and Growth Drivers: Mehta suggested that private sector banks, including ICICI Bank, might underperform compared to HDFC and Kotak. He attributed this to "a lot of excitement around the smaller banks, the PSU banks where the valuations are lower and growth rates are higher."

PSU Banks' Technical and Financial Strength

The Nifty PSU Bank index has shown technical strength, indicating positive investor sentiment.

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  • Index Breakout: The Nifty PSU Bank index has achieved a "clean breakout above 7,200" after a period of consolidation. A sustained weekly close above this level is considered key.

  • Moving Averages: The index is trading above its 50 exponential moving average (EMA) at 6,375 and its 200 EMA at 5,004, suggesting a bullish long-term trend.

  • Financial Stability: Asset quality in PSU banks has remained stable, with gross non-performing assets (GNPA) in check and a provision coverage ratio (PCR) around 75-90%. Treasury gains have helped offset some pressure on net interest margins (NIMs).

  • Analyst Targets: SEBI-registered analyst Finkhoz sees the Nifty PSU Bank index potentially reaching 7,800–8,000, provided it sustains above 7,200, with a support level at 6,700. Top PSU picks include SBI, Canara Bank, and Indian Bank.

Sectoral Preferences and Avoidances

Mehta has articulated clear preferences for certain sectors, advising investors to overweight some and avoid others.

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  • Overweight Recommendations: Mehta recommends being "overweighting PSU banks and cement sectors."

  • IT Sector Avoidance: He advises investors to "avoid software services due to potential policy impacts" and notes the IT sector is "stuck in a secular stagnation with low single-digit growth."

  • Specific Stock Mentions:

  • Brokerages: Motilal Oswal is suggested as a brokerage to consider.

  • Specialty Chemicals: SRF and Navin Fluorine are identified as investment opportunities.

  • Food Delivery: Zomato remains positive for the long term.

  • Capital Goods: Companies like L&T, KEC International, Kalpataru Power, ITD Cementation, and Afcons are broadly performing well.

Expert Analysis and Divergent Views

Market observers offer differing perspectives on sector performance and outlook.

  • PSU vs. Private Banks: While Mehta sees PSU banks outperforming private lenders due to lower valuations and higher growth, other analyses highlight that many private sector banks and NBFCs have disappointed in terms of earnings growth.

  • IT Sector Outlook: Mehta's caution on the IT sector contrasts with positive outlooks for specific niche players like Coforge and Persistent Systems. However, the general sentiment described for the software sector is one of "secular stagnation."

  • Capital Goods Drivers: The "significance of execution" is highlighted as a key factor for capital goods companies, suggesting that operational efficiency is critical for their success.

Conclusion and Future Outlook

The current market landscape, as interpreted by market expert Dipan Mehta, indicates a strong preference for PSU banks and capital goods sectors, driven by attractive valuations and growth prospects. While PSU banks demonstrate robust financial and technical indicators, the broader IT sector faces challenges, with only select companies showing promise in niche segments. Investor strategy, according to this analysis, should involve overweighting PSU banks and cement, while exercising caution with IT stocks.

Sources

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Frequently Asked Questions

Q: Why are PSU banks doing better than private banks right now?
PSU banks are showing growth that is as good as or better than private banks. Investors like them because their prices are lower and they are growing faster.
Q: What is happening with capital goods and IT stocks?
Capital goods companies are doing well, especially those that can get work done. Some IT companies are also doing okay in special areas, but overall, the IT sector is growing slowly.
Q: Which sectors does expert Dipan Mehta recommend investors focus on?
Dipan Mehta suggests investors put more money into PSU banks and cement companies. He also likes some specialty chemical and food delivery stocks for the long term.
Q: What sectors should investors avoid according to the expert?
Dipan Mehta advises investors to stay away from most IT software stocks because their growth is very low and might be affected by new rules. He is also cautious about the metals sector right now.
Q: What is the outlook for the Nifty PSU Bank index?
The Nifty PSU Bank index has broken through a key level and is trading above important moving averages, showing a strong trend. Analysts believe it could reach 7,800 to 8,000 if it stays above 7,200.