Expert View: ‘Nifty 50 could rise 5-6% by year-end; Infosys, Sonata Software are two preferred IT stocks’

Expert Opinion: Achin GoelVice President of Bonanza Grouppoints out that the Nifty 50 is trading at around 19 times its annual earnings per share (EPS), which is comparable to its 15-year average. He expects a nearly 5-6 per cent growth in the Nifty 50 by the end of the year. In an exclusive interview with Mint, Goel discussed the impact of the US Federal Reserve’s interest rate cut on the Indian stock market and the opportunity areas for investors.

Edited excerpts:

Nifty has risen around 15 per cent this year. Do you think it can add another 8-10 per cent by the end of the year?

The Indian equity market has performed remarkably well so far in 2024, with the Nifty 50 up around 15 per cent this year, largely thanks to resilient domestic flows of $4 billion in August alone and over $23 billion so far this fiscal, the fourth-highest in India in a year.

On the other hand, FIIs (Foreign Institutional Investors) were neutral on the market. Nifty 50 has been gaining since June as markets celebrated the installation of the new NDA government.

The September series started on a positive note as the index closed at an all-time high, crossing the 25,000-mark on increased optimism around Indian equities.

Moreover, liquidity remains high with large DII (domestic institutional investors) flows significantly outpacing FII flows, heralding a strong festive season supported by rural recovery and potential rate cuts.

Nifty is currently trading at around 19 times annual EPS (earnings per share), which is comparable to its 15-year average. We can expect almost 5-6 percent growth by the end of the year from here.

Where do you see opportunities in this market?

Despite the global recession and geopolitical challenges, Indian markets have shown remarkable resilience, approaching all-time highs and cementing India’s position as the world’s fifth-largest economy.

The current landscape offers significant opportunities, supported by solid structural factors for long-term growth. India’s political and regulatory environment remains stable and investment-friendly.

With an ambitious target of achieving 50 percent of total installed generation capacity from non-fossil fuel sources by 2030, the government intends to increase its focus on renewable energy, which will require adding 50 GW of renewable energy capacity per year for the next five years, with an allocation of around ₹28,352 crore, up 50 per cent over the previous year ₹18,945 rupees.

In addition, aggressive allocation ₹The budget allocation of Rs 11.11 lakh crore for infrastructure, especially roads, highways, railways and water treatment, indicates the potential for further growth in these sectors.

These factors provide a compelling argument for continued investment in these areas in the coming quarters and years.

Could you suggest some IT stocks that deserve investors’ attention?

The Nifty IT index hit a record high in August 2024, boosted by expectations of a potential interest rate cut by the US Federal Reserve.

We believe that the US interest rate cut will boost technology spending, especially in sectors like BFSI, which are key for Indian IT companies.

Lower interest rates typically lead to higher spending on technology, which benefits Indian IT companies that derive a significant portion of their revenue from the US market.

The latest data shows an increase in consumer confidence in the US, which could be a sign of an improving economic situation and increased spending on technology.

However, despite the positive outlook, there are concerns about a potential slowdown in US economic growth, which could impact technology spending. We believe the near-term outlook for IT stocks is favorable.

Still, headwinds persist in the US economy, with household debt reaching a record high of $17 trillion in March 2024, weakening consumer spending, etc.

While the Nifty IT index is currently at a record high and is supported by expectations of interest rate cuts, the longer-term outlook will depend entirely on the timing of the Fed’s rate cut and the extent to which the US economy manages to recover.

Among large-cap IT stocks, investors should look out for Infosys, which has delivered a stellar performance across the board in Q1FY25, outperforming its rivals on key metrics such as consistent revenue and margin growth.

The company reported revenue growth of 3.6% quarter-on-quarter (QoQ) to USD 4,714 million, while in CC (constant currency) terms, growth was 2.5% year-on-year (YoY).

Net profit increased by 7.1% year-on-year. ₹6,368 crore, beating consensus estimates. Infosys also raised its revenue growth forecast for FY25 to 3-4 per cent from the previous 1-3 per cent, signalling better IT spending by customers.

In the mid-cap segment, Sonata Software looks promising as its focus on securing large deals and acquisitions and expanding its customer base demonstrates the company’s commitment to growth and innovation.

Sonata’s efforts to leverage artificial intelligence and new technologies such as Microsoft Fabric will help it achieve significant revenue growth in the future.

What is your take on the big private banking stocks? Kotak Mahindra Bank, IndusInd Bank and HDFC Bank have been laggards in the past year.

Banking stocks have been off the radar of investors since the beginning of the year, with Bank Nifty underperforming the Nifty 50. We have seen private bank margins come down to 30-50 basis points in the last four quarters. Private banks have a higher CD (credit-to-deposit) ratio of 87 per cent on average.

Kotak Mahindra Bank, IndusInd Bank and HDFC Bank have term deposit ratios of 83.77 per cent, 87 per cent and 103.55 per cent respectively due to high upfront demand and low deposit availability, which has led banks to opt for expensive deposits and increased cost of funds.

High-priced deposits are hurting margins and to mitigate the impact, banks are shifting to high-yield advances, raising concerns that asset quality will be hit in the coming quarters. These concerns are also weighing on advance growth as banks opt for a cautious approach.

All these factors are weighing on banks’ growth and profitability, which is why private banking stocks like Kotak Mahindra Bank, IndusInd Bank and HDFC Bank have underperformed over the past year.

HDFC Bank: HDFC Bank is focused on driving deposit growth in the face of challenges as it pursues its deposit credit strategy.

The bank plans to improve its branch network and customer engagement while maintaining stable deposit prices.

The Company intends to reduce its loan-to-deposit ratio to its pre-merger level, which adversely affected lending growth, which will positively impact its net interest margin in the coming quarter.

Indus Ind Bank: Advances growth was moderate due to a decline in MFI (microfinance institution) loans, while non-vehicle retail loans grew faster.

Vehicle business is expected to improve with the timely arrival of monsoon. Operating metrics were weak due to higher expenses and credit costs, which compressed profitability.

Kotak Mahindra Bank: Retail loan growth has slowed due to regulatory restrictions on digital adoption and credit card issuance.

Deposit growth stagnated and CASA fell due to strong growth in term deposits. Margins tightened due to rising costs and lower profitability.

Asset quality deteriorated, particularly in the unsecured retail sector, leading to higher slippages and credit costs.

Given concerns about inflated valuations, isn’t it time to focus more on defensive instruments?

The number of increases and decreases is little changed. Prices are a bit high, but a slightly higher valuation is justified given India’s macroeconomic stability.

Over the past two to three years, industrials, state-owned enterprises, real estate and similar stocks have dominated the markets, and for good reason — government capital expenditure has been extremely high, probably by 20 percent or more.

By comparison, government spending on revenues has been rather modest.

For the last three to four years, the consumer sector of the economy has been growing at a CAGR of only 3-4 percent. Yet, based on GDP data, we believe it is heading south.

This time, the spread is a bit more even, with the industrials and durable goods sectors posting particularly solid profit growth. We see two main areas of profit dynamics.

How could the US interest rate cut cycle impact the Indian stock market? Which sectors could benefit?

The expected change in monetary policy by the US Federal Reserve, highlighted in comments by Jerome Powell, has already had a noticeable impact on global markets.

The likelihood of a 25 basis point (bp) Fed rate cut in September 2024 is high and appears to be largely priced in.

Hence, its direct impact on the Indian stock market may be limited.

However, if the Fed steps up a larger 50 basis point cut, it could trigger an initial, significant rally in Indian equities, especially in sectors that are sensitive to global liquidity and interest rates.

Export-oriented sectors including IT and pharmaceuticals could benefit from a stable or weakening rupee as a weaker rupee would make Indian exports more competitive.

On the other hand, a deeper rate cut could indicate serious concerns about US economic growth, which could potentially cause more market volatility.

While a modest rate cut will not dramatically change market dynamics, a more aggressive cut could temporarily boost growth stocks in India and impact sector performance.

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