‘We have a 40,000 yr-end Sensex target’
A more difficult first half might precede a stronger second half for Indian equities, ABHIRAM ELESWARAPU, head (India equity research), BNP Paribas, tells Ashley Coutinho in an interview. A volatile currency and unpredictable politics could remain concerns. Edited excerpts:
Your outlook for the market for this year?
The past year was challenging, with the Nifty marginally down and held up only by a handful of stocks. The BSE mid-cap and small-cap indices are down 20-30 per cent over the past year. Macro factors such as trade wars, oil prices and currency have fluctuated significantly, making it more of a trading market than one for investing.
To us, 2019 appears a story of two halves for Indian equities; a more difficult first half might precede a stronger second half. India is rated ‘neutral’ in our Asia ex-Japan model portfolio. We have a 40,000 year-end Sensex target, which presents about a 12 per cent upside, though we expect most of this to play out in the second half.
Do Indian markets look overvalued at this stage?
The Nifty trades at about 17 times its estimated one-year forward earnings and 2.5 times the priceto-book (P/B), slightly above historical levels. This is not egregiously expensive on an absolute basis but more expensive than the usual relative to Asian peers. This valuation is also based on the consensus forecasts that are calling for Nifty earnings growth of 12 per cent in 2018-19, followed by a sharp pick-up to over 21 per cent growth in 2019-20, which carries a risk of being too optimistic.
Your view on mid and small-caps as investment bets?
Mid-cap and especially small-cap valuations have certainly corrected from the highs of last year. The mid-cap index, however, still trades at similar valuations as the Nifty, though small-caps are well below the historical levels. Some of these stocks have fallen for good reason, whereas others might have been unfairly penalised and, thus, present buying opportunities.
In the long term, we are sector or market-cap agnostic and focus more on a methodical bottom-up approach to stock picking that has so far served us well, despite volatile markets. Our process emphasises firms with proven competitive advantages and quality of earnings, with the aim of picking winners across sectors. Several mid- and small-cap names across sectors feature in our recommendation lists. Our current positive recommendations include select private banks, non-banking financial institutions and insurance, consumer discretionary, energy and tech sectors.
Do you see a sustained recovery in corporate earnings in the coming quarters?
Yes, we expect corporate earnings to improve gradually. Much of this is predicated on the back of continued policy reform domestically, asset quality improvement at banks, the interest rate cycle pausing and recovery in corporate capex. All these factors are opportunities and earnings drivers but also present risks if they do not pan out as expected.
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