Should one go back to defence & railways stocks with pressure on market easing? Dhananjay Sinha answers

Dhananjay Sinha, Co Head of Equities and Head-Research, Systematix Group, says RBI has pushed in a lot of liquidity through OMO purchases, the rupee-dollar swap to infuse liquidity, and CRR cuts since December. The pressure on the market has eased and there is a certain buoyancy, at least sentimentally. After a severe correction, it is creating buoyancy. It has to be seen whether this translates into a fundamental up cycle from an earning standpoint. That, Sinha thinks, is a few months away, but in the interim, the sentiment is positive and some of the depressed sectors, especially the financial sector is responding quite positively.


It seems like the tide is finally turning around. Is the recovery looking believable?
Dhananjay Sinha: We have had a significant correction in valuation, especially in the largecap names. If you look at Nifty and the valuation has corrected quite a lot. I would say even the broader index, while it is still at a premium versus the benchmark, has undergone a severe correction if you look at the stock performance at all.


So, the anxiety is fading a little bit. I would say from a global market standpoint, the concerns with respect to Trump tariffs and stuff that anxiety is kind of coming off in the context that people do believe that with an expectation of a recession in the US, there might be some tempering in the in the strident move US had taken with respect to tariff hikes, etc, so that part is actually coming off.

The US 10-year has come down from 4.80 to 4.20 levels, VIX index has also come off. So, if you look at some of the global dynamics, it has kind of somewhat easing and that is supporting the markets as well, market sentiment in general in India wherein we have seen a significant FII outflow earlier on. So, there is some comfort that is happening over there.

From an India standpoint, we have seen that RBI had actually pushed in a lot of liquidity through OMO purchases, the rupee-dollar swap to infuse liquidity, and the amount of liquidity that RBI had put in through these measures, CRR cuts since December is of the order of roughly about 6.9 lakh crores. So, there is a certain infusion of liquidity, RBI has also eased the regulatory tightness with respect to NBFCs, it does appear that they are trying to address the slowdown with respect to using a certain relaxation for the financial sector.

What we see is a culmination of all these factors sort of easing the pressure on the market and there is a certain buoyancy, at least sentimentally it does appear to be happening. I would say that is where we are and especially after a severe correction it is creating a certain amount of buoyancy. We will have to see whether this translates into a fundamental up cycle from an earning standpoint, that is a few months away, but I would say in the interim does look to have created a sentiment which is positive and which is reflecting some of the depressed sectors, especially the financial sector is actually responding quite positively because it is very close to what RBI is trying to do.

So, the proximity of this sector to RBI’s move is very strong. So, that is where we are seeing all the NBFC space and some of the banking sector names doing well. I would say PSU banks have seen a correction but they are not participating at this juncture. So people are looking at beaten down stocks and trying to do some bottom fishing at the broader level as well.

That debate on whether to go back to those frenzied defence and railway names keeps coming back and one is a little wary about getting into these names once again. What is your own call on how one should approach defence and railways stocks?
Dhananjay Sinha: This comes in the overall context of government capex and what we are of the view is that the ability of the government to push a lot of infrastructure and capex spending will be limited. In the context of how the fiscal situation is panning out, the tax collection, if you look at the data, especially after July, there is a fairly tepid growth in the overall context, especially as there is a decline in corporate tax collection and government is actually going ahead with a tax cut next year as well.

So, we have to be a little careful about the capex plan of the government. I would say defence is something that can hold on. It is far more resilient from a geopolitical standpoint and given what is happening globally, that is something that can remain somewhat stable.

On the railways, the government has spent a lot over the last five-seven years and might be at a maximum level of spending that one can expect. So, between roads and railways, infrastructure spending and defence, it is defence that looks to be much more resilient in the context of geopolitical development. A lot more investment might be done in Europe, for instance, because of the new capability that those guys will be building up and also in general, the geopolitical context in Asia as well would also prompt the government to ensure that they keep on spending there.

There has been a correction in HAL and BEL prices. There has been a significant decline in defence stocks over the last six months. One can look at those selectively. There can be a rebound because the stocks have corrected. The valuation is good. So, there is the possibility of a little bit of rebound out there.