10 stocks from different sub-segments of financial service space with more than 25% upside potential

Just because of the stock, HDFC bank came under pressure, a narrative got built, that the whole banking and financial services sector is facing headwinds. But the fact is financial service is a very broad term, it would be wrong to look at them with the same lens. Each segment is an industry in itself which is governed by an operating matrix which is very different from another. For example, a Housing finance company can be happy with 10 percent net margins, but for an average asset management company ( AMC) the net margin would be more than 30 percent. Similarly, a gold loan company is best of the NPA provisioning ability but the margins are not very high. The only common thing which binds the financial service sector is the GDP growth rate as the growth in all segments have a certain well defined relationship with growth in GDP.

Consumption also seems to be softening. I think for India, the key to long-term growth is going to be really to unlock more growth in potential output.

The RBI, also the banking sector regulator, is closely monitoring profitability and other financial performance measures of these conglomerates and their companies besides parameters such as the quantum of debt raised from other sources like external commercial borrowings or bonds for any signs of stress.

One sector which did not recover from the shock of the global financial crisis for more than a decade was the real estate sector. Excess inventory, over leveraged balance sheets and weak demand were some of the factors which plagued the sector. Although the process has been slow, it took almost a decade but there has been a clean up in the sector. Regulatory changes like bringing in RERA and banks getting aggressive in recovering dues from builders and also judicial intervention had an impact on the working of the industry.

In the correction that markets saw in the last four trading sessions, the financial sector stocks, right from banks to other players also declined. But if one looks at the magnitude and the internal breadth of the sector it was much better as compared to a month back when the market correction was started by HDFC bank. There was a bit of profit booking in the PSU bank space, but once again after a small corrective move, things were back with a strong intraday recovery. The way things are panning out in the industry with regulatory tightening taking place, there is very likely that we might see a divergence in performance of different segments of this sector which has the highest correlation with the GDP growth. Better balance sheets and strong franchise are likely to be the differentiating factors. The factor which is largely technical in nature is the shareholding patterns that will also impact the performance of the stocks from this sector.

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The brokerage expects banks under its coverage to report a strong 44% YoY growth in net profit in the last quarter of FY23, led by a 30% growth in pre-provision operating profit.