Mazagon, HAL, UCO Bank, BOB: Can defence, PSU bank stocks continue to deliver big in 2023?

The Make-in India push lifted defence stocks while a catching up of valuations supported the PSU banking pack in 2022, making them outlier in an otherwise flat year for key stock indices. These sectors are, however, unlikely to deliver big next year, said analysts, who see real estate and pharma among pockets gathering momentum going ahead.

Among defence stocks, Mazagon Dock Shipbuilders climbed 186 per cent so far this year. From Rs 278.90 apiece to Rs 798.45 level, the scrip climbed nearly 3 times this year. Hindustan Aeronautics rallied 108 per cent while Bharat Electronics climbed 42.56 per cent during the same period. Cochin Shipyard has also jumped 52 per cent per cent this year.

In the PSU banking pack, UCO Bank jumped 140 per cent; Bank of Baroda rose 121 per cent, Punjab & Sindh Bank advanced 110 per cent while shares of Indian Bank also doubled. Union Bank (up 83 per cent), Bank of India rose (up 69 per cent), Canara Bank (58 per cent), Indian Overseas Bank (58 per cent) have jumped (58 per cent) and Bank Of Maharashtra (57 per cent) also gained sharply during the year. 

Narendra Solanki, Head - Equity Research at Anand Rathi said defence stocks rallied due to healthy order book, revenue expansion, government schemes etc. But he feels that growth expectations are fully priced in and now much is dependent on delivery.

"Hence, similar kind of performance may not be there what it was in 2022. Real estate sector looks poised to perform well in 2023, given that inflation has started to ease down and interest rate for home loan may start to peak by first half and stabilise thereon," Solanki said.

Sunil Nyati, Managing Director at Swastika Investmart said he is bullish on the banking sector, particularly the leader PSU bank SBI.

"But I am not comfortable with a sharp run in some of the smaller PSU banks. Many of them are trading P/BVs that are higher than SBI's. I would suggest booking profits in a bank like UCO Bank," Nyati said.

Some pockets such as PSU banks, IPOs and a few new generation companies did well in 2022 due to tactical gains, said Vinod Nair, Head of Research at Geojit Financial Services. He does not see them sustaining gains in the medium-term.

"We also recommend to move-out or reduce exposure in interest rate sensitives sectors like banks, NBFC, auto and Infra, which have done well in 2022, as transmission of interest rate garners in 2023. Weightage lending rate of private banks have increased by only 90 bps compared to 225 bps increased by RBI in 2022," it said.

Sectors to bet on

Real estate stocks have not done too well in 2022. Nifty Realty Index has declined 12 per cent, underperforming the Nifty, which has gained approximately 3 per cent.

"2023 could see better times for real estate stocks as several things are working in favour of the property sector. E-commerce firms are investing in new warehouses and commercial office demand is expected to pick up as more work moves back offline. The housing market will likely see an upward trend too. So, overall, a good year for real estate is a strong possibility," said Marc Despallieres. Chief Strategy & Trading Officer at Vantage.

For PSU banks, Despallieres said PSU banks do not have strong risk management practices. "Their asset quality may not be as good as that of the private banks. You could see a fall in PSU bank stock valuations by the end-2023," he said.

Nirav Karkera, Head of Research, Fisdom said the pharmaceutical sector is poised for a rebound going ahead. The year 2022 was not particularly noteworthy for the sector owing to its major dependence on China for raw materials and shortages thereof on account of Chinese shutdowns, he said,

"Other reasons includes slowing down of revenues through pandemic-related segments and unfavourable pricing in the West. However, the valuations of the sector look comfortable while the fundamentals remain strong. Prospect look bright for the sector going ahead and prices can be expected to catch up with expected earning expansion," he said.

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