Expert view: ICICI Securities’ Pankaj Pandey on earnings recovery, valuations & top IT, banking, defence stock picks

Expert views on the Indian stock market: Pankaj Pandey, the head of research at ICICI Securities, believes India Inc.'s earnings may start showing recovery from the first or second quarter of the next financial year (FY26). He added that valuations have become more reasonable after the correction and provide lucrative opportunities for long-term wealth creation. In an interview with Mint, Pandey also shared his top stock picks from the IT, defence and banking space. Here are edited excerpts of the interview.

How would you assess the market performance in FY25? Did it meet expectations, or were there notable disappointments?

FY25 was a roller-coaster year for domestic equities, with markets scaling new highs of 26,277 levels in September 2024 and then giving up the majority of the gains and closing the year with 5 per cent returns.

The volatility in the index was largely a function of the plethora of events, be it geopolitical tensions, elections in major economies (including India, USA, UK, and Japan, among others), as well as concerns of tariffs imposition by the US and its effects.

On the domestic front, major disappointment was modest traction in capex (a function of elections) as well as some signs of consumption slowdown.

What key factors should investors watch for in the coming year that could influence market trends?

As we embark on CY25, the impending volatility looms with tariff-led uncertainty in the US as well as muted global growth expectations.

It is early to say if the anxiety over tariffs is over since the US and China are imposing tariffs on each other, and the fallout from this trade war can have adverse consequences on overall global growth and inflation.

Domestically, economic growth remains largely unaffected amid tariff tantrums, albeit pockets of exports may face some challenges. Nonetheless, we expect a pick-up in capex as well as consumption (given tax benefits) to provide a major kicker for overall growth in FY26.

When do you foresee a meaningful earnings recovery for India Inc.? Will it materialise in Q4FY25, or is Q1FY26 a more realistic timeline?

With election-led uncertainty behind us and a growth-oriented Union Budget in place, we expect corporate earnings to resort to a double-digit earnings trajectory starting FY26E.

The timing of earnings recovery could be Q1 or Q2, but that’s not an important metric to track. Post-correction, we believe valuations have become more reasonable, and the present market provides extremely lucrative opportunities for long-term wealth generation.

Encouragingly, the global and domestic interest rate cycle has started its downward trajectory and should support equity valuations going forward.

What’s your outlook on the Indian IT sector? How should investors position themselves, and which stocks stand out as strong picks?

The Indian IT sector remains under pressure as discretionary spending stays weak despite some improvement in Q2 results and FY25 guidance.

Growth recovery is expected to be slow, given the US economic slowdown and uncertainty over rate cuts, which could impact IT budgets.

Additionally, potential austerity measures under Trump’s administration, including spending cuts by Elon Musk’s Department of Government Efficiency (DOGE), may pose risks, though the direct impact on Indian IT firms should be limited.

Looking ahead, cost-focused deals may rise while macro concerns persist. With this cautious commentary, we believe that growth recovery for the Indian IT space will likely be pushed out to FY26, given the US economic growth challenges.

Amid this backdrop, we prefer Infosys, Persistent Systems, and Coforge because of their strong deal pipelines and digital and cloud services leadership.

Do you see the banking sector driving the next phase of the market rally? Which stocks, in your view, offer the best opportunities?

Banks and NBFCs seem well-positioned to deliver relative outperformance due to steady business fundamentals and attractive valuations.

While margins will be under pressure as we move course in the new fiscal year, the central bank's liquidity infusion is expected to bring deposit inflows, stabilising NIMs (net interest margins) over the next couple of quarters.

A reduction in risk weight for exposure to NBFCs and relaxation in the new tax regime is expected to abate credit growth momentum.

In contrast, asset quality, except for a few pockets of unsecured retail loans, is largely expected to remain steady. In addition, valuations, currently lower than the long-term average, provide comfort and make us optimistic about the sector.

We prefer large lenders with a diversified asset mix, healthy liabilities franchise and track record of prudent underwriting within the sector. Thus, our picks are HDFC Bank, Axis Bank and Kotak Mahindra Bank.

Is there still room for substantial upside in PSU, defence, and railway stocks? Which names do you find most promising?

We remain constructive in the defence sector given the government's equipment acquisition plans over the next few years. Post a dull nine months FY25 in terms of ordering activity, contracts awarding activity has also picked up substantially in the last two to three months as the government remains focused on making the acquisition process faster and more efficient.

In the last month, the government has awarded a flurry of orders worth nearly ₹54,000 crore.

From a stock perspective, we like companies with a more structural growth path (visibility in order inflows, higher margins, and strong working capital) ahead vis-à-vis companies with lumpiness in orders and growth prospects.

In the defence space, we like HAL, BEL, and Astra Microwave Products.

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Disclaimer: This story is for educational purposes only. The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions, as market conditions can change rapidly, and circumstances may vary.