Motilal Oswal is positive on the banking, financial services and insurance (BFSI) space though the sector remains under pressure currently owing to the impact of the second wave of COVID-19. The brokerage in a note said that it expects a strong rebound in their earnings "as the credit cost moderates".
"While the near-term outlook remains cautious due to COVID 2.0 impact and ongoing lockdowns in key states, vaccination drives across the country would aid quick recovery," it said in a report.
"We are positive on the banking, financial services and insurance (BFSI) space given the strengthening economic recovery and the progress being made in improving asset quality," it added.
The financial sector is the largest constituent of all the benchmarks with weights of 38-43 percent in Nifty50 and BSE-30 indices.
As per analysts, due to the divergent stock performance of Indian financials, there's a need for an active stock selection strategy.
According to Motilal Oswal, the BFSI sector underperforming the Nifty over the past few months presents an attractive opportunity for active stock selection given the reasonable valuations.
Also, the RBI’s 'accommodative' stance, along with the recent measures announced for the impacted sectors, should help financials in general, it said.
In the first edition of its BFSI Model Portfolio, the brokerage is 'overweight' on ICICI Bank, SBI, and Axis Bank among the large-cap financials. Within the mid-cap space, it likes Muthoot Finance, Cholamandalam Finance, Shriram Transport Finance and AU Small Finance Bank.
Among the non-lending financials, it prefers Max Financial and ICICI Prudential within Life Insurance and ICICI Securities, SBI Cards, and IIFL Wealth within other financials.
The brokerage believes that as the recovery momentum picks pace, the valuation re-rating will play an important role in the stock return.
However, it is 'underweight' on NBFCs in general due to the looming uncertainty surrounding the second wave and rising inflation levels.
MOSL explained that unlike many other sectors, BFSI offers a varied play on the different sub-segments, with different underlying characteristics, on account of varied customer profiles, product offerings, and liability structures (such as gold financiers, MFI lenders, and rural-focused lenders).
Banks with a strong liability franchise tend to benefit in a stressed environment while, non-lending financials tend to perform better in an adverse lending environment, it said.
Thus, these sub-segments present an opportunity to cherry-pick stocks based on the prevailing outlook for the identified sub-segments, it added.