Brokerages bullish on banking, IT

Weakening rupee, higher oil import bill seen benefiting technology stalwarts

With the earnings season kicking off on Tuesday "" with Infosys and TCS announcing their quarterly results "" brokerage houses are placing their best bets on banking and information technology stocks.

Both these sectors have a short-to-long term performance advantage, especially the banking sector, which is undervalued now, brokers said.

The IT sector is perhaps the only one which will not be affected by rising crude prices. On the contrary, the weakening rupee, following a higher oil import bill, will actually benefit IT companies.

In the short term, there are some concerns for the banking sector due to expectations of rising interest rates "" this will eat into banks' treasury profits and depreciate their bond portfolio.

Motilal Oswal, managing director of Motilal Oswal Securities, says: "While we are positive on the long-term prospects of Indian banks, we believe the markets are focusing excessively on near-term interest rate movements. The deep pessimism in the sector, reflected in the valuations of the stocks, provides an excellent entry opportunity for long-term investors."

This view is echoed by many others. Srinivasan Varadarajan, managing director and head of markets, J P Morgan, said: "Banking definitely has good long term prospects". He added that the second quarter results might not be that good chiefly due to the interest rate impact.

Manish Chokhani, director, Enam Securities, qualified this, saying: "from the price perspective, banking looks good. But on the performance side, we are not so sure." The brokerage is marginally overweight on the banking sector.

Incidentally, banking stocks are trading near their lowest valuations ever "" some at below their book values "" while dividend yields are between five to seven per cent. Foreign brokerage CLSA, in its latest India strategy report, says the banking sector "looks the best ever in decades."

As regards the IT sector, Motilal Oswal says: "The IT sector continues to benefit from a strong volume growth, stability in pricing, weak currency and room for better earnings prospects."

The buoyancy is expected to continue for the next few quarters "with potential of pricing uptick." Enam is overweight on the sector and had previously ranked it as an outperformer, though the weightage has now been reduced. Chokhani said the stocks are already trading at 20 times forward PE for 2006. "So valuations are not cheap."

He said that, if the performance for the second quarter is good, it will mean a continuation of the current growth trends.

Oswal says "sustainability of the current environment will lead to further earnings upgrades for the sector, which will be catalyst for further outperformance."

Srinivasan said IT valuations, though they looked slightly overheated, still hold the promise of significant upticks. Cement and auto "" the traditionally defensive sectors"" are still heavy in everyone's portfolios though the rising prices of metals globally has changed the scene somewhat.

J P Morgan analysts said oil and petrochemicals stocks are also attracting attention due to the upside potential when retail prices are finally increased. Petrochem companies margins are up 50 per cent compared to the previous year.

Pharmaceuticals, especially multinational pharma companies, have become value picks now with the WTO regime coming into force next year. Valuations of the stocks went up during the month of September and mutual funds are betting on it and adding it to their portfolios.