Banks, IT to defence: Dr Vikas Gupta of OmniScience Capital lists sectors that can turn wealth creators over 3-5 years

Mint

20-05-2025

Dr. Vikas Gupta, CEO & Chief Investment Strategist at OmniScience Capital, believes several sectors in India are showing immense investment opportunities, with banking, IT, logistics, defence and power among others can emerge as wealth-creating sectors over the next few years. On the index level, he sees things aligning, with the reclusive earnings recovery possible this year. However, for index investors in mid and small-cap, he advised being careful as these indexes are overvalued. Edited excerpts:
As the various factors causing uncertainty are settling down, the earnings growth remains the most important factor which determines the future market direction. We should ideally not focus on the earnings at the index level, but rather focus on specific sectors and their earnings growth.
For example, for the Nifty 50, after financial services, IT, and oil & gas are the largest contributors. IT earnings could take some more time to recover. Oil & gas are heavily dependent on volatile global market prices of crude oil. So these kinds of pulls are making the Nifty 50 earnings growth slightly challenging. Despite this, we expect a double-digit earnings growth for the Nifty 50 this year. Possibly, second half onwards, we should start seeing some predictability. Irrespective of the headline-level index earnings, several industries are doing quite well and showing steady growth.
The DII ownership increase reflects the consistent allocation via SIP and lump sum by Indian retail investors to mutual funds through ups and downs. The mutual fund inflows continued despite the markets falling from September 2024 to February 2025. During this period, the FIIs were selling and DIIs were buying, thus increasing the DII ownership relative to FIIs.
The inflows to DII from Indian investors continue. However, now the FIIs have started coming back, and hence the markets are responding since both DIIs and FIIs are competing for investing in the markets, and thus the additional FII money is pulling the markets up. Eventually, if the FII money keeps flowing, they could start taking their ownership share higher.
Nifty PSU Banks are trading at a PE of 7. This is extremely low and shows that PSU Banks might be available at strong discounts to their intrinsic values. In fact, according to the scientific investing framework, banks, especially PSU Banks, have strong balance sheets with low NPAs and unutilised lending capacity. As the lending capacity is utilised due to strong demand for capital from Government of India's capex in infrastructure, corporate capex requirements and household capital demand for housing and consumer durables, the return on equity of the banks should increase faster than the asset growth. Thus, driving strong earnings growth. A rerating of the PSU banks to even 10-15 PE on accelerating earnings should drive huge value in the investor portfolio.
The risks would be a slower demand for capital. The risk of increasing NPAs seems low in the next couple of years.
Our scientific investing framework has thrown up several promising growth vectors which could be wealth creators over the next 3-5 years. These are growth vectors which have double-digit expected growth rates over the next 5-10 years or more. However, these companies are available at large discounts to their intrinsic values.
We already discussed PSU banks and banks in general. Banking on growth is one of our strongest, most promising themes. Second, we see a strong opportunity in the housing finance segment. Another strong growth vector is power. Besides these, we believe that logistics would be one of the unanticipated growth vectors.
On IT, once the US economy settles down, we should expect gains from the AI-related demand. However, this could take a couple of years to manifest.
We are also optimistic about seeing India emerge as a global manufacturing hub with Make in India. Also, we are excited about the commercial services space.
Also, remember that defence, as highlighted by Operation Sindoor, is a multi-decadal theme for India but one has to be careful on the valuation front as far as defence companies are concerned and should be selective or broaden their investment universe to include other dimensions of defence beyond arms and ammunition to economic warfare, cyber security, strategic materials, logistics and supply chain etc. Another multi-decadal theme is Railways, with growth visibility for a long time.
With the Indian large-cap space defined as the top 100 stocks and midcaps as the next 150 stocks, this is a relatively small universe to select stocks. On the other hand, there are 1000s of stocks in the small-cap space. Naturally, the probability of finding investment opportunities in the small-cap space is higher. However, as discussed earlier, banks and power companies are mostly large and midcaps. Housing finance, logistics, manufacturing, and commercial services are mostly small-caps. Railways and defence companies are across the capitalisation spectrum. Thus, today one can find opportunities in both large and small-caps.
But we would caution index investors in mid and small-cap to be careful, as these indexes are overvalued. However, if one is creating an active portfolio, there are opportunities.
But one must stay away from the popular companies and use a well-designed investment process similar to the Scientific Investing Framework that we follow. This helps safeguard our portfolios from capital destroyers (weak balance sheets/loss-making companies), capital eroders (companies with no moats) and capital imploders (overvalued companies).
We are not too focused on the chemical sector since there is a strong dependency on crude oil, China and global demand-supply factors. These factors make it quite difficult to have confidence in their revenue and earnings growth. Currently, they are not on our radar.
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.