Omniscience constructive on large and mid-size PSU and Private Banks, small-cap housing finance companies
In the wake of El Nino, Ominscience Capital considers FY27 and FY28 to be challenging years for the rural economy. Agricultural production is likely to be affected by the weather phenomenon which could weaken the purchasing power of the rural population. As a result, the PMS is underweight on rural-focused sectors such as FMCG and automotive due to expectations of slower earnings and revenue growth, as well as high valuations.
At the same time, the PMS is constructive on the financial services sector, which comprises 35-40% of the Nifty50’s market capitalisation.
Strong credit growth and clean balance sheets bode well for banks and NBFCs
“We are extremely positive on the financial services sector. It is the largest sector in the benchmark index and has several sub-sectors within it. Among these, we are overweight on PSU banks and private Banks, mostly large and mid-sized ones,” says Vikas Gupta, CEO and Chief Investment Strategist at OmniScience Capital.
The PMS is also positive on housing finance companies, which mostly fall in the small-caps and mid-caps segments. “Further, infrastructure NBFCs and few select consumer finance companies are also looking attractive to us,” adds Gupta. The credit growth for banks recently has been in the 17 – 19 percent range. Crucially, their balance sheets are clean, NPAs are low, CRAR—Capital risk-weighted asset ratio, also called Capital Adequacy Ratio, a measure of a bank’s ability to absorb unexpected losses and remain solvent during financial express—is high, showing idle lending capacity.
Insurance sector faces headwinds from IRDAI draft rules
Green shoots in banking notwithstanding, the recent rules proposed by the IRDAI pose major headwinds from the insurance sector. The lower expense of management (EoM) limits and commission caps proposed by the insurance regulator could pressure insurer margins and hurt a lucrative fee stream for banks and NBFCs, if implemented. “Brought into effect, the proposed rules would have a significant impact on growth, because the distribution channel is going to be hit to such an extent that in the near-term, there is likely to be negative sentiment from the channels. Hence, growth is likely to be slower,” says Gupta.
Eventually, the markets might readjust to it and retrieve growth. However, near-term prospects definitely look challenging. Direct-to-customer might emerge as a channel over the medium term for incumbents, concludes Gupta.
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