Financials drive Sensex higher; buy these 5 BFSI stocks for 10-12% upside potential in short-term

Domestic benchmark index S&P BSE Sensex surged 600 points higher in the last hour of trade on Tuesday, helped by banking and financial services sector players. Of the top 6 Sensex gainers, three were banks and one was a non-bank lender. The recent upward march by the financials is driven by the strong business growth being seen in the industry in the second quarter of this fiscal year. Business volumes, ranging from growth in advances to growth in deposits, have been moving above the pre-coronavirus levels in well placed players while others are returning back to normal levels.

Among the top performers on Tuesday were Housing Development Finance Corporation (HDFC) shares gaining 8.35%, trading at Rs 1,934 per share, followed by IndusInd Bank shares that jumped 3.46% to trade at Rs 622 per share. Bajaj Finance and HDFC Bank were up over 2% each. The S&P BSE Bankex index zoomed 2.07% with all constituents trading with gains while the S&P BSE Finance index gained over 3%. A number of global and domestic brokerage research firms suggest that leading lenders in India are trading at discounted valuations. Domestic brokerage Motilal Oswal has narrowed it down to 5 financial stocks as its high conviction basket. “One can buy this basket of 5 stocks with a potential upside of 10-12% over a time frame of 1-3 months. The stop loss for the entire basket should be 5-6%,” it said.

ICICI Bank

Weightage – 25%

The private lender is one of India’s leading banks. ICICI Bank shares closed up 1.96% at Rs 380 per share. “Earnings were in line despite the bank prudently making higher provisions toward COVID-19. Overall, the moratorium book has declined and the bank has built a relatively higher provisioning buffer at 1.3% of loans to endure the COVID crisis,” the report said. 

HDFC Bank

Weightage – 25%

India’s largest private sector lender has been a market leader and with its healthy assets and strong books remains well placed to gain market share. “The bank has reflected strong deposit trends, led by CASA. Thus, we expect HDFCB’s strong liability franchise and the fixed rate nature of the book to continue to support the margin trajectory,” the brokerage firm said. In the second quarter of this fiscal year the bank saw advances grow 16% on-year basis. HDFC Bank shares ended 2.59% higher at Rs 1,143 per share on Tuesday.

HDFC Ltd

Weightage – 25%

India’s largest mortgage lender reported data for the second quarter that hints that business is recovering well. Individual loan applications were up by 12% from the previous year, and loan approvals were up 9% on-year basis. “.HDFC remains among our top picks in the sector. The Real Estate sector is seeing a gradual turnaround and HDFC is well-poised to benefit from the same,” the report added. 

M&M Finance

Weightage – 12.5%

Shares of the NBFC jumped 2.25% today to trade at Rs 131.7 per share. The firm has seen improvements in on-month disbursements and collections. “ Within its product mix, Tractors, Entry-level Cars, and LCVs are likely to do well. The company has taken over Rs 11 billion COVID-19 provisions over the past two quarters, amounting to nearly 2% of the loan book,” Motilal Oswal said. The stock is still down 35% year-to-date.

Cholamandalam Finance

Weightage – 12.5%

The report noted that two aspects of Cholamandalam’s vehicle finance business stand out when compared to peers. “It is well-diversified across product segments and there is no state-level concentration – the largest state accounts for only 11% of the total portfolio,” it said. Additionally the company’s business segment related to the farming sector is likely to fare better given the strong monsoons and healthy rabi crop harvest. Stocks were up 4.9% today to end the day’s trade at Rs 264.8 per share.