Stock market bets on Nifty Financials; expects profits to double by FY24

Indian indices Nifty 50 and BSE Sensex delivered phenomenal returns in the last two years. From the pandemic low of 7,511 in March 2020, Nifty has gained around 9,700 points, while Sensex zoomed over 32,000 points from March low of 25,639.

Equity markets’ phenomenal rise was supported by adequate liquidity sloshing around the globe. Thanks to massive balance sheet expansion by Federal Reserve and European Central Bank (both expanded $4 trillion) since pandemic, equity markets across the globe were awash in liquidity.

In India too, Reserve Bank of India pumped in excess liquidity in the financial system and expanded its balance sheet. Greed and Fear report by Jefferies believes RBI balance sheet peaked in October 2021 at ₹64.4 lakh crore and currently stands at ₹63 lakh crore. With RBI absorbing ₹1.4 lakh crore from the banking system in the last three months, days of easy money policy are over. Central banks across the globe are either planning to lift rates and absorb excess liquidity or have already raised interest rates, like Bank of England and Brazilian Central Bank that raised rates last week.

In the backdrop of changing monetary stance, investors are wondering what could lift Indian indices?

Street optimism on Nifty Financials

Stock index performance primarily depends on profits made by constituent companies. Market participants believe Nifty Financials, which hold 37.5% weightage in the broader Nifty 50 index, will give stellar performance in the next two years. Harshad Borawake, Head of Research, Mirae Asset Investment Managers, believes Nifty Financials that include banking, insurance and asset management companies will do the heavy lifting for Nifty. “Provisioning cycle for banks has normalised and the bulk of Nifty profit growth in future will come from Financials,” he adds.

Harshad is not alone in his optimism. Investors are pinning their hopes for earnings revival on Financials. As per Bloomberg Consensus estimate, Nifty EPS is expected to grow by 19% and 16% in FY23 and FY24 to ₹882 and ₹1,020 per share. During the same period, Nifty Financials EPS is expected to grow by 27% and 21%.

The street is expecting a cumulative profit of ₹1,96,230 crore and ₹2,37,616 crore from Nifty Financials companies in FY23 and FY24. In FY21, cumulative profit of Nifty Financials was ₹1.2 lakh crore, while in FY20 it stood at ₹1.02 lakh crore. Street optimism is evident from the anticipated numbers that show companies in Nifty Financials are expected to double earnings in just three years.

This optimism is well captured in the share price of State Bank of India which clearly outperforms broader Nifty with a handsome return of 35.65%, compared to index return of 15.34% in the last one year. State Bank of India is India’s largest bank in terms of assets and well captures the banking landscape of the country.

In 2018, public sector banks including SBI were making a provision of 2% to 2.2% of total assets, which has now come down to 1% to 0.8%. Reduced provisioning is strengthening the bottomline and earnings per share (EPS) of the Financials. Most of the future profits of banking sector will come from normalisation of provisioning, believes Borawake.

High hopes from the banking sector is visible in returns of the Banking index. Most of the banks have announced Q3 results and in the last one month Nifty Bank, with a return of 0.68%, has massively outperformed Nifty 50 that yielded (-)3.36% in the same period.