Power financiers better bets in BFSI space; capex theme still looking good: Amnish Aggarwal

Amnish Aggarwal, Head - Research, Prabhudas Lilladher, says power financiers are currently focused on renewable energy, a stable sector that positions them more favorably than many non-banking financial companies (NBFCs) or banks. Their growth rates are expected to be strong, and their financial portfolios are mostly insulated. However, these companies have seen significant re-rating, leading to much higher valuations. While there has been some correction and consolidation, a potential rebound is possible, though it may not match the previous rally.

Also, capex-themed sectors like railway, defence, or infrastructure companies continue to look good.

What have you made of some of these power sector financiers? PFC, REC, and IREDA had massive re-ratings. IREDA, after its listing, saw that bumper gain. Of course, right now, the Q3 data is out. And the disbursements continue at a very accelerated pace. Though the stocks have come off materially from highs and we have stopped speaking about them for the last two-three months, do you think they will make a bit of a comeback?
Amnish Aggarwal: In the current context, there is every possibility that they might show some bounce back because in the entire BFSI space, particularly in the last two-three months, the scenario has changed significantly because credit growth is softening, the cut in interest rate has been delayed, plus the fear of NPAs for banks from the unsecured loans and even in the MFI space, are cropping up.

In this kind of scenario, since power financiers are catering to renewables, they are catering to a sector where there does not seem to be much trouble as of now. So they seem to be better placed than many of the NBFCs or banks in the current context because their growth rates will be high. The books are relatively insulated at this point of time. The only factor seems to be that they have got massively re-rated and so the valuations there are not where they used to be a couple of years back. They have corrected and consolidated. So, some sort of a bounce back, cannot be ruled out, but definitely not the rally we have seen. Relative to the other BFSI segments, these companies seem to be on a better wicket.

What is your view on infrastructure, defence, and some of the public sector, capex-facing sectors? Should one incrementally invest there or not really?
Amnish Aggarwal: Capex still remains a very potent theme because if you look at announcements in the past couple of months in particular, whether it is railways, infrastructure, or defence, everything is picking up after a lull of six months or so. While we believe that this year, the capex target of the government will not be achieved, next year we can see a smart increase happening. So, overall, the themes look good whether it is railway, defence, or infrastructure companies.

Going by the targets of the government and the infrastructure requirements of the country, overall it should be decent. But having said that, in many of the companies in this sector, even in terms of engineering, in terms of the broader capex theme, many of the companies might have already hit the peak in terms of their margins.

So, incrementally, what has been happening over the last couple of years is that profit growth has been significantly higher or multiple times higher than the sales growth, but that is not likely to be the case going forward. The gap between the profit growth and the sales growth will narrow down considerably. Incremental re-rating will happen very selectively from here on. But if you are looking at incrementally rising CAGR returns from here on, on a very stock-specific basis, it is still going to be one of the fastest-growing segments.

What is your view on the entire financials pack because in 2025, we are expecting a couple of regulations, some new norms like LCR norms kicking in? Also, some impact is expected on the NBFC front. If you have to play the entire financial space, would you be picking private banks or PSU banks or a bunch of these NBFC stocks?
Amnish Aggarwal: The entire space is in some sort of a flux as of now because there are trouble areas cropping up in various segments in the financial space. The only positive seems to be that the valuations in many of these banks are not inflated as of now, and even in case of NBFCs, today the stocks have corrected anywhere between 25% and 30% from the peaks which they were operating at.

Now, incrementally, one can look at these stocks but on a very stock specific and selective basis. The ride will not be very smooth, whether it is PSU banks or private banks. At this juncture, I will be very stock specific. For example, an ICICI Bank looks decent at the current juncture. ICICI Bank, HDFC Bank can give double-digit returns. But can they give a very high return? I do not think one should expect that in the banking sector. But some of the beaten down names where there are uncertainties today, whether these are related to NBFCs or MFIs, over the next couple of quarters, could be under some more pressure, but by the end of the year, as things stabilise, there is a probability of making high percentage returns in those stocks.

But any which way, the sector will give you moderate returns, not very high returns, and the near-term volatility will remain in the sector.

What we did see in terms of the outsized returns this year was the entire financial markets theme. I mean, whether it was a BSE, KFin, Angel One, CAMS, or CDSL, those constituents of the financial markets ecosystem were up 100-150%, to say the least. Do you expect this theme to continue or are the stocks getting very punchy with respect to valuations?
Amnish Aggarwal: This entire theme can fall under the ambit of service providers and these are all annuity-based businesses. Exchanges are slightly different and even AMCs did quite well last year. Now, till the time markets remain good, the inflow into the mutual fund and SIPs continue and IPO rush continues, some of these companies will continue to do well.

But having said that, in terms of re-rating many of these stocks after the jump, are trading at 30-40 times because today perception of the markets is that as the economy grows, as the financialization of saving happens in India, these companies can give 15-20% profit growth and they need to be trading at 30-40 times.

In terms of further re-rating, the scope does not look likely to be there or it seems very limited. But yes, there is still scope to make CAGR returns over there, but one should not go overboard and buy these stocks at any levels because if the markets turn weak, even for a quarter or so, then if some impact comes on numbers, then some correction cannot be ruled out. But if you are taking a 3-5-year kind of a view, then some of these stocks have got an annuity kind of income and can provide steady returns.

What is the expectation on the earnings season? Will some of the consumption plays continue to face some more earnings pressure or could there be a positive surprise?
Amnish Aggarwal: We expect that 3Q will continue to show some pressure, particularly on the staple side, because of input cost increase. The impact of these increases, led by edible oils, will play out fully in the current quarter, because last quarter it happened towards the fag end of September.

Secondly, on the demand side, where rural remains resilient, urban demand will continue to face pressure and 3Q will show more pressure for many of these staple names than what we have seen in 2Q. So, the same trend is more or less likely to continue in case of staples. For many of these companies, 3Q might make a bottom in terms of performance or maybe

I am looking at some sort of a stabilisation and leading to some bit of green shoots appearing towards the fag end of 4Q. But yes, some of the discretionary segments because of the wedding season and all, might do better. Some seasonal uptick is also seen in the QSRs. So, while on a YoY basis, there might not be many big sparks in terms of profitability, on a QoQ basis, some of these QSRs might show some sort of green shoots.