PSU banks offer highest alpha potential over medium term: Omniscience Capital
PSU banks stand out for strong balance sheets, double-digit growth and valuations below intrinsic value, while expensive consumer and hotel stocks remain less attractive.
Crucially, undervalued businesses are expected to see their valuations improve while expensive companies could remain stagnant until their earnings catch up. (AI Image)
India’s domestic economy continues to demonstrate resilience, with revenue and earnings growth remaining healthy despite geopolitical uncertainty, according to OmniScience Capital.
Vikas Gupta, CEO and Chief Investment Strategist at OmniScience Capital, believes that the possibility of 7%+ GDP growth exists in the current fiscal year. Even if the West Asia conflict does not end immediately, India could remain in a high-growth mode for the current and coming years if other factors remain supportive.
The portfolio management services venture states that the markets will increasingly differentiate between companies based on their future cash flows. Crucially, undervalued businesses are expected to see their valuations improve while expensive companies could remain stagnant until their earnings catch up.
Banking a mispriced opportunity; PSU banks having strongest alpha potential
For OmniScience Capital, banking remains the most compelling opportunity, combining strong balance sheets, double-digit growth and valuations that remain meaningfully below intrinsic value. Gupta describes it as a theme that is “completely mispriced.”
Within the segment, PSU banks offer the highest alpha-generation potential over the medium term. Gupta said PSU banks have some of the cleanest balance sheets in decades, while delivering double-digit asset and revenue growth. Furthermore, the public sector banks are trading at significant discounts to intrinsic value.
While mid-cap private banks could see their valuations unlock earlier and potentially generate higher IRRs, OmniScience remains overweight across the banking sector, including PSU, large private and mid-cap private banks.
Valuations temper enthusiasm for consumer plays
OmniScience remains underweight on consumer discretionary despite satisfactory revenue and earnings growth, as valuations already appear to discount significant future growth. The same valuation discipline keeps the firm cautious on hotels, where strong fundamental performance alone does not provide sufficient comfort without a meaningful discount to intrinsic value.
IT faces fundamental uncertainty; AI bubble risk remains overseas
IT remains one of the sectors to avoid, according to Gupta, owing to uncertainty around the sector’s workforce required to deliver future workloads and the resulting difficulty in forecasting cash flows.
On AI, Gupta believes any potential bubble is more likely to be concentrated in US companies, primarily because Indian corporates are not deploying capital towards AI at comparable levels. Irrespective of whether a bubble exists, the unprecedented investment by Big Tech will ultimately need to translate into revenues, profits and cash flows, concludes Gupta.
