Business
Private Banks poised for strong growth; defence valuations limit upside, says Nikhil Ranka
Sharing his assessment of the results so far, Nikhil Ranka from Nuvama Asset Management highlighted that large private sector banks have delivered largely in line with expectations, while valuations are now turning attractive.
“Broadly, if you look at it, for most of the large private sector banks — HDFC, ICICI, Kotak — all have reported earnings and the numbers have broadly been in line. The good part is, if you look at valuations for most of the large private sector banks, they are now below two times price to book. Historically, if you look at all of these banks, be it Kotak, ICICI, HDFC, they have traded anywhere between two-and-a-half to three-and-a-half times one-year forward earnings,” Ranka said.
He added that the operating environment is turning more favourable as the interest rate cycle stabilises.
“As we enter FY27, the NIM cycle is clearly looking like it has bottomed out. So one, you will have 12% odd credit growth and to top that, if we have NIMs improving and credit cost getting contained, then in all probability, looking at FY27 being more like a 15% earnings growth for most large private sector banks. So, the outlook for private sector banks from here on is extremely positive. My sense is most of these banks should give between 15% to 18% compounding going forward,” he said.
Turning to the defence sector, Ranka acknowledged the strong earnings momentum and healthy order books but cautioned that valuations may limit further rerating.
“The order book is extremely healthy for some of the defence companies. Just for example, if you look at BEL, you have almost two to three times visibility of revenues. The current order backlog is two to three times of what they annually do in terms of revenues and everybody is looking forward to what the defence spending number would be in the budget,” he noted. Ranka said the market is factoring in a rise in defence allocations.
“We are currently pencilling in a 10% growth in the defence budget when the budget gets announced on Sunday. So that, to a large extent, is keeping the stocks pepped up. My sense is the valuations for most of the names are anywhere between 35 to 40 times now. So, the scope for incremental PE multiples to rerate from here on looks limited to me. However, if the earnings continue to grow at 15% to 17%, then broadly investors can look at that sort of returns from these levels, but multiple rerating from here looks difficult,” he said.
On ITC, Ranka struck a cautious tone despite the recent correction in the stock, citing concerns around taxation and its impact on volumes.
“The problem with ITC is not the near-term earnings. If you look at the change in taxation that was proposed 15 days back, in order to offset the increase in excise duty, you need almost a 28% to 30% hike at the portfolio level. Now, one thing is very clear that if you take a 25% to 30% hike at the portfolio level, for the next two years, volume growth will be extremely difficult,” he said.
He added that volume pressures could persist.
“In the first year, you can have anywhere from 8% to 10% volume decline and probably a flat number next year. So, the stock might look cheap at 20 times FY28 earnings. We are at close to Rs 17 to Rs 17.5 EPS for ITC. But you have a flat EPS trajectory unless some tweaks happen on the taxation in the budget and therefore, the street will not get excited. You could have 5% moves here and there, but you cannot have a 20% move unless we get some relief on taxation from the government for tobacco,” Ranka said.
