PSU banks offer highest alpha potential over medium term: Report

New Delhi, Aug 21 (IANS) India’s banking sector offers the most compelling opportunity in equity markets, led by public sector banks, which have the strongest alpha‑generation potential over the medium term, a report said on Friday.

The report from OmniScience Capital said the firm remains overweight on banking — including PSU, large private and mid‑cap private banks — while staying underweight on consumer discretionary, hotels and IT amid valuation and earnings uncertainty.

The firm preferred banking sector due to strong balance sheets, double-digit growth and valuations that remain meaningfully below intrinsic value.

“Banking is a theme that is completely mispriced,” Vikas Gupta, CEO and Chief Investment Strategist at OmniScience Capital, said, adding, PSU banks have some of the cleanest balance sheets in decades, while delivering double‑digit asset and revenue growth.

Further, the public sector banks are trading at significant discounts to intrinsic value.

The portfolio management services venture said 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.

The report forecasted that mid-cap private banks could see their valuations unlocked earlier and potentially generate higher internal rate of returns (IRR).

India’s domestic economy continues to demonstrate resilience, with revenue and earnings growth remaining healthy despite geopolitical uncertainty, the firm noted.

Gupta noted that over 7 per cent GDP growth is possible 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,” he said.

The valuation discipline kept the firm cautious on hotels, where strong fundamental performance alone does not provide sufficient comfort without a meaningful discount to intrinsic value.

The firm cautioned against investment in IT over uncertainty around the workforce needed to deliver future workloads and the difficulty of forecasting cash flows. On artificial intelligence, the firm said any potential bubble is more likely concentrated in US companies 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,” the report said.

—IANS

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