JM Financial's Portfolio Shake-Up: NBFCs & Infra Soar, Banks Face Downgrade! Your Next Investment Move?

JM Financial Revises Model Portfolio, Favoring NBFCs and Infrastructure

JM Financial has updated its model portfolio, making significant shifts in its sector weightings to better align with current market performance and future growth prospects. The brokerage firm has upgraded both the Non-Banking Financial Company (NBFC) and Infrastructure sectors to an 'Overweight' rating, signaling strong conviction in their potential.

Sector Revisions by JM Financial

• JM Financial's latest model portfolio review involves turning 'Overweight' on the NBFC and Infrastructure sectors.
• The firm has maintained its bullish outlook on the consumption sector.
• Conversely, the banking and insurance sectors have been retained with an 'Underweight' rating.

NBFC Sector Outlook

• The NBFC sector demonstrated robust performance, outperforming banks in the second quarter with a 27% year-on-year growth in Profit After Tax (PAT).
• This growth was primarily driven by diversified lenders, supported by healthy loan disbursements and stable or improving asset quality.
• Margin expansion of 10 basis points quarter-on-quarter further bolstered sector performance.
• JM Financial projects continued improvement in NBFC performance through the second half of Fiscal Year 2026, anticipating benefits from enhanced growth, Net Interest Margin (NIM) expansion, and reduced credit costs.
• Potential interest rate cuts are also identified as a key positive catalyst for the sector.

Infrastructure Sector Growth Drivers

• Strong order inflows and high EBITDA delivery are expected to drive further positive revisions for infrastructure companies in FY26 and FY27.
• The sector is anticipated to benefit from increased capital expenditure from the Middle East and significant investments in India's power transmission infrastructure.
• The possibility of unexpected order wins in the second half of FY26 could lead to upward adjustments in FY27 EPS estimates.
• In the logistics segment, current EBITDA estimates for FY26 may be met or surpassed, suggesting potential for earnings upgrades.
• Improved gearing levels, a result of strong cash generation, could also lead to increased near-term payouts for investors.

Consumption Sector Support

• JM Financial retains a bullish perspective on the consumption sector.
• This positive outlook is bolstered by proactive measures from the Government of India and the Reserve Bank of India (RBI) aimed at stimulating consumption.
• Key initiatives include reductions in income tax and interest rates, an increase in banking system liquidity, and adjustments to GST rates.

Banking and Insurance Sector Concerns

• The brokerage firm maintained its 'Underweight' rating for the banking sector.
• It highlighted that any further reduction in interest rates could potentially extend the time required for net profit growth normalization.
• Before the RBI's Monetary Policy Committee (MPC) announcement on December 5, 2024, which saw a 25 bps rate cut, JM Financial anticipated NIM improvement in the subsequent 1-2 quarters, assuming no further rate cuts, due to benefits from deposit re-pricing and CRR flows.
• In the insurance sector, HDFC Life Insurance was removed from the model portfolio.
• This decision was influenced by a substantial 300 basis points gross impact on margins attributed to GST 2.0.
• Despite this, JM Financial expects that margins in FY26 will be better than those recorded in the first half of FY26.

Impact on Investors

• This strategic revision by JM Financial provides clear signals for its clientele regarding preferred investment areas.
• Investors may consider increasing their allocation towards NBFC and Infrastructure stocks following these recommendations.
• A degree of caution is suggested for the banking and insurance sectors, which might experience more subdued performance compared to the favored sectors.
• The sustained positive outlook on consumption indicates potential investment opportunities within companies operating in this segment.

Difficult Terms Explained

• Model Portfolio: A sample investment portfolio recommended by a financial advisory firm, reflecting their research and market outlook.
• Overweight: An analyst rating suggesting a stock or sector is expected to outperform the broader market and thus warrants a higher investment allocation.
• Underweight: An analyst rating indicating a stock or sector is expected to underperform the market, recommending a lower investment allocation.
• NBFC: Non-Banking Financial Company. These entities provide financial services like loans and insurance but do not possess a full banking license.
• Infrastructure: The sector encompasses the development and maintenance of essential public facilities and services, including transportation networks, energy grids, and telecommunications.
• Consumption Sector: Companies engaged in producing and selling goods and services that are purchased by individual consumers for their daily needs and use.
• PAT: Profit After Tax. This is the net profit a company earns after all operating expenses, interest, and taxes have been deducted.
• NIM: Net Interest Margin. It measures a financial institution's profitability by calculating the difference between the interest income generated and the interest paid out, as a percentage of interest-earning assets.
• GST: Goods and Services Tax. An indirect tax levied on the supply of most goods and services within India.
• RBI MPC: Reserve Bank of India Monetary Policy Committee. This committee is responsible for setting the benchmark interest rate (repo rate) and other monetary policy decisions in India.
• CRR: Cash Reserve Ratio. The percentage of a bank's total deposits that it must legally hold in reserve with the central bank, typically as cash or with the central bank itself.
• Deposit Re-pricing: The process by which a bank adjusts the interest rates offered on its existing customer deposits, often in response to changes in policy rates or market conditions.
• GST 2.0: Refers to a significant update or reform in the Goods and Services Tax regime, which can have varying impacts on different sectors.