Banks and finance companies’ earnings are at record highs, but their weightage in the benchmark Nifty 50 index is on a downward trajectory as investors expect a better show from other sectors in the New Year. Banks, finance, and insurance (BFSI) companies now have a combined weightage of 34.5 per cent in the Nifty 50, down from 36.7 per cent at the end of December 2022 and an all-time high of 40.6 per cent at the end of December 2019. This is the sector’s lowest weightage in the index since December 2021 when it was 33.7 per cent. (See the adjoining charts).
In comparison, the combined net profit of listed BFSI companies was up 31 per cent year-on-year to an all-time high of Rs 1.09 trillion during the July-September 2023 quarter (Q2FY24), while the combined earnings of all listed companies were up 38 per cent Y-o-Y to Rs 3.07 trillion, down from Rs 3.18 trillion in Q1FY24. However, excluding oil marketing companies such as Indian Oil, Bharat Petroleum, and Hindustan Petroleum, the combined net profit of the rest of the non-BFSI companies was up 23.9 per cent Y-o-Y in Q2FY24 to Rs 1.4 trillion.
The decline in BFSI weightage in the index is attributed to the relative underperformance of banks that dominate the BFSI space. For example, the banking sector index, Bank Nifty, is up just 11 per cent year-to-date in 2023, against an 18 per cent rally in the Nifty 50 index.
Analysts attribute this to investors’ pessimistic view of banks’ earnings in FY25. “Banks had robust earnings growth in the last two years, but their earnings outlook is not very bullish. In contrast, the market remains very bullish on sectors such as automotive, FMCG, power, and infrastructure,” says Dhananjay Sinha, head of equity and strategy at Systematix Institutional Equity.
According to him, banks’ earnings in the last two years were boosted by multiple tailwinds such as a sharp decline in provisions for bad loans, expansion in margins, and double-digit growth in loan books. “Many of these tailwinds would vanish in FY25, and there has been a steady deterioration in the quality of banks’ earnings in the last two quarters, such as a decline in margins amidst rising competition in the retail loans segment,” he adds.
Others say that the decline in the BFSI sector’s weightage simply reflects a relatively better show by other sectors. “BFSI companies also contributed to the rally and saw an increase in their share price, but the rally was much stronger in sectors such as automotive, power, infrastructure, and IT Services. As a result, these sectors saw an increase in their index weightages while BFSI companies lost out a bit,” says G Chokkalingam, founder & MD of Equinomics Research & Advisory Services.
However, he remains bullish on the future prospects of banks and finance companies given the continued double-digit growth in retail credit and a reversal in the interest rate cycle.
The power sector, including stocks such as National Thermal Power Corporation (NTPC) and Power Grid Corporation, has been the biggest winner, and the sector’s weightage in the index has more than doubled to nearly 4 per cent now from 1.8 per cent a year ago. The construction and infrastructure sector also outperformed, and the combined weightage of Larsen & Toubro and Adani Ports & SEZ rose to 5.7 per cent from 4.4 per cent a year ago.
Automakers such as Maruti Suzuki, Tata Motors, Mahindra & Mahindra, and Bajaj Auto also increased their heft in the index, and the sector’s weightage in the index has now risen to 6.5 per cent from 5.4 per cent a year ago. IT Services exporters such as Tata Consultancy Services (TCS), Infosys, and HCL Tech, and FMCG majors such as ITC, Hindustan Unilever, and Nestle also outperformed the broader market in 2023, despite a deterioration in their growth and earnings in Q2FY24.
Analysts attribute the outperformance of the IT Services and FMCG sector to the market expectation of a turnaround in corporate earnings in these two sectors in FY25 after two years of muted growth.
First Published: Dec 19 2023 | 8:39 PM IST