BNP sees value in India equities even after records

MUMBAI • By at least one measure, Indian equities look attractive relative to their regional peers even after posting new records in the new year.

That’s the view of BNP Paribas SA, which forecasts the benchmark S&P BSE Sensex to post its third annual gain in 2018, helped by a revival in company earnings and economic growth.

The euphoria in equity markets worldwide has left the Sensex trading at 3.2 times book value, not cheap in absolute terms.

But with the MSCI Asia Pacific Index trading at 1.73 times — the highest level since 2008 — the gap between the two gauges’ ratio is the narrowest in about a year.

“India has traditionally traded at a premium to Asian peers because of a better return-on-equity profile, but the price-to-book premium that India enjoyed has narrowed,” Abhiram Eleswarapu, head of India equity research for BNP, said in an interview in Mumbai.

“It’s difficult to make a statement that India is expensive to its Asian peers.”

The Sensex will likely end the year at 37,500, he said, implying a 8% advance from yesterday’s close.

The index rallied 28% in 2017 in one of Asia’s best performance as a slew of economic reforms including implementing a nationwide sales tax and a funding plan for state lenders prompted Moody’s Investors Service to boost the nation’s rating to the highest since 1988.

If stocks maintain the upward trajectory, it won’t be a “smooth line of returns”, Eleswarapu said.

There’ll be “a few shallow corrections, with the year likely to end with positive returns”, he said, maintaining an ‘Overweight’ stance on the nation’s market.

Earnings of companies in the MSCI India Index may rise by 15% to 20% in the financial year starting April 1, as businesses have recovered from the disruption caused by the new sales tax implemented in July, he said.

BNP expects a profit growth of just under 10% in the current fiscal year.

Here are some highlights from Eleswarapu’s interview:

Are expensive stock valuations a big concern?

“The disconnect between earnings and valuations is probably because investors are looking a year or two ahead.

“We’ll see this big divergence narrowing over the next couple of years. In the past 18 months, we have seen

intense policy reform action and the benefits of these measures tend to come with a lag, after probably an immediate adverse reaction.

“Most investors looking at India understand this. (Note: The Sensex trades at 18.8 times blended forward 12-month earnings, near the highest in a decade.)”

Which sectors do you prefer?

“The sector that is healthy and growing is consumer discretionary.

“This includes segments like automobiles and jewellery. Financials, more on the private side but also selective public sector banks.

“The government’s recapitalisation plan should help them to resume lending and regain some market share.”

What are the key risks facing Indian markets? “Consensus estimates are calling for a 20% growth in the financial year of 2019 (FY19) and much higher in FY20.

“We can have a risky situation, if for some reason the numbers are not delivered.

“Inflation is also one aspect to worry about.

“The rural economy’s performance so far hasn’t been convincing and we haven’t seen the sort of pickup in spending despite good consecutive monsoons.”

What’s your outlook on overseas inflows?

“Flows into emerging markets (EMs) will remain positive as long as global central bank balance sheets are expanding, which is happening despite announcements from the US Federal Reserve and the European Central Bank.

“Also, flows into EMs come with a lag of a few quarters to this expansion. We expect foreign institutional investor flows to be positive until the second half of this year.” — Bloomberg