Analysts pick their top sectors for 2024

By Tejas MD

Every January at the start of the new year, people are reliably infected with a disease we call 'predictionitis', where they fall over each other to predict events for the next year. Sadly, it is an illness with no cure.

This year as well, 2024 has begun with predictions around the Nifty 50, with analysts saying that the index may reach 25,000. India’s strong growth is expected to boost the stock market - the economy is set to outperform other large countries in FY24, with growth estimated at 6.7-7%.

India stood out in 2023, attracting the highest FII inflows among emerging countries. During the latest monetary policy meeting, RBI Governor Shaktikanta Das said, 'Despite challenges in the global economy, India is poised to become the new growth engine of the world.'

However, the landscape isn't all roses and jasmine - some signals are worrying. Foreign direct investment to India has declined, with the usual average of $40 billion in annual FDI sinking to just $13 billion in 2023.

Private capex by Indian companies is still weak, despite pleas from senior ministers like Nirmala Sitharaman to invest: 'Are you like Hanuman,' she asked Indian CEOs, 'that you do not believe in your own strength, and someone has to stand next to you and say, "you can do it"?'.

In this week’s Analyticks, we, with our own case of predictionitis, identify sectors that are likely to excel in 2024, helped by macroeconomic tailwinds. We will also check the roadblocks that could ruin the party.

2024’s star sectors: The top four sector picks by analysts for the new year
Screener: Rising stocks with high average Forecaster target price upside %

The Nifty 500 closed in the green for the fifth consecutive year in 2023, with a 25.8% gain. Half of these gains were achieved in the last three months of 2023. Realty, hardware technology & equipment, utilities, transportation and fertilizers sectors played an outsize role in driving the Nifty 500 higher.

Top five sectors driving Nifty 500's growth in October-December 2023

The realty sector led the pack with a 36% gain in the last three months. It is also among the top sectoral picks for 2024 by several brokerages, including ICICI Securities, BOB Capital Markets, and Motilal Oswal Financial Services.

Banking and finance, infrastructure and general industrials are other sectors that have been favourites in 2023, which analysts believe will continue to outperform in 2024. Sunil Subramaniam, CEO of Sundaram Mutual Fund, says, 'Banking and financial services will be the focus at the beginning of the year. After that infra and capital goods will take over.'

Why are analysts so bullish on these sectors? They are counting on two major factors: likely interest rate cuts, and the Centre’s push on infrastructure development.

Financial services and realty sectors are counting on rate cuts in 2024

Tomato sellers were hiring bouncers to protect their produce in the first half of 2023, as inflation sent prices up, and the RBI raised interest rates. Now, with inflation cooling and below the RBI’s upper tolerance limit of 6%, analysts are hoping for rate cuts. Deutsche Bank expects the RBI to cut interest rates by 100 bps in FY25, starting in the second half of 2024.

Lower rates will reduce borrowing costs for companies and consumers. Loan demand in India was strong in 2023 despite high rates, driving the growth of the banking and finance sector. Interest rate cuts will give the sector a further boost.

Advances growth on a sharp rise since FY20

Banks and NBFCs plan to disburse more loans, as demand grows in 2024. According to IDBI Capital, Federal Bank, ICICI Bank and Shriram Finance will be growth stocks in the sector.

Another sector that is expected to do well due to rate cuts is realty. Housing demand has jumped sharply in the past year, with decade-high sales in the top seven cities, and unsold inventory at record lows. As the realty sector operates on high debt levels, falling interest rates will help both builders and homebuyers. Analysts expect Sunteck Realty, Mahindra Lifespace Developers and Macrotech Developers to benefit from the rate cuts.

Government capex boosts infra and general industrial sectors, but private capex is still missing in action

On my way to work in Bangalore, I often see earthmovers, men in hard-hats, and construction material piled up on the sidewalks. It feels like there is always construction going on - a new road, flyover, metro line. Most of these new projects are part of the Centre’s infra push, as the government increased the capex allocation in its budget.

This has led to a sharp increase in order wins for infrastructure companies. According to analysts, NCC and J Kumar Infraprojects are expected to benefit due to their on-time order execution. In Q2FY24, NCC’s order book hit an all-time high of Rs 61,796 crore (up +54% YoY) while J Kumar Infra’s order book rose to 16,447 crore (up 43.7% YoY).

In the general industrials sector, brokerages are positive about Siemens and ABB India on the back of PLI schemes and high capacity utilization.

But with capex, the active participation of private players is a missing piece.

Alex Travelli of The New York Times says 'Green and red lights are flashing for the Indian economy at the same time. The government will eventually have to reduce its extraordinary spending, which could impact the economy if private sector investment doesn’t pick up.'

The corporate sector is still on the fence. This is likely due to high interest rates, which are expected to fall in 2024. Companies are also looking for political stability, and waiting to see if the ruling party gets re-elected this year.

The 'joker in the pack': wars are a key risk in 2024

The problem with war is that it can be contagious. A small war can quickly spiral into a regional crisis, dragging in neighbouring countries. February will mark two years since the beginning of the Russia-Ukraine war, and tensions are igniting elsewhere. The Israel-Gaza war is now seeing conflict spillover into the Red Sea, where Iran-backed Houthi rebels are targeting container ships and oil tankers. The Israel-Lebanon border has also turned violent.

Ranen Banerjee, Partner at PwC India’s Economic Advisory Services, says 'The joker in the pack is geopolitics and conflict hotspots. The trend in current conflicts will determine whether GDP growth rates will bias to the lower or higher end.'

Screener: Rising stocks with high average Forecaster target price upside %

Godawari Power & Ispat leads in average Forecaster target upside

After a slow start to the year, the Indian market rose sharply in the second half of 2023 with the Nifty 50 index rising by 12.4% over the past six months. This can make it hard for investors to find stocks with more potential to grow. In this screener, we take a look at stocks with high average Forecaster target price upside % despite seeing gains in their prices over the past quarter. The screener is dominated by the software & services, banking & finance and chemicals & petrochemicals sectors.

Major stocks that appear in the screener are Godawari Power & Ispat, RattanIndia Enterprises, EPL, EIH, Adani Energy Solutions, Infibeam Avenues and Tanla Platforms.

Godawari Power & Ispat has the highest average Forecaster target price upside of 28.1%, following a 23.2% rise over the past quarter. This metals & mining stock’s price has increased by 96.9% over the past year. Analysts believe that the company still has room for growth, owing to rising domestic demand for iron ore and increased production of high-grade pellets.

EPL is another player with a 24.5% average Forecaster target price upside. It has also risen 6.1% over the past quarter. ICICI Securities believes that this commercial services & supplies company will see revenue growth as recyclable tubes are expected to account for 60% of its revenue by FY26. The company is also planning to expand its customer base into the Brazil market.

You can find more screeners here.