FII View: India trading at a premium but offers comparatively reasonable growth


Relative to Asian peers, India is trading at a premium to its historical average valuations, while most EM peers are slightly below their mean levels, Abhiram Eleswarapu, Head of India Equity Research at BNP Paribas, said in an interview with Moneycontrol’s Kshitij Anand.

Edited excerpts:

Q: Do you think RBI should have done more in its policy meeting to push growth and investment in the Indian economy?

A: We think the Reserve Bank of India (RBI) did what was required for now. Perhaps, the only additional thing they could have done was to cut the cash reserve ratio (CRR) or the statutory liquidity ratio (SLR).

Now, with the elections behind us, we believe that the liquidity situation will gradually improve. The Union Budget is also only a few weeks away.

It may be prudent, therefore for the RBI, to wait and watch the government’s plans, and then introduce any additional policy measures, if required.

Q: How safe are debt fund now given rising concerns from IL&FS and DHFL fiasco that could push investors away for some time now?

A: Yes, we think there could be a continued impact on flows into debt funds, at least in the near-term. The recent events are also a wake-up call for the investors who may have erroneously assumed that debt funds provide higher returns for the same level of risk as fixed deposits.

Q: Where do you see the market going from here on?

A: Nifty at C18.5x one-year forward P/E trades at more than +1SD above its five-year average valuations. Our year-end Sensex target of 42,000 suggests a potential 5 percent upside.

This return, however, may not be linear as several short-term issues are lined up in the next few months. The immediate ones are not comforting and include a likely below-normal monsoon, continued consumer stress and liquidity/ solvency issues impacting the NBFCs.

However, beyond that, positive catalysts could be the new government laying down an aggressive policy roadmap, an expanded package of income support for farmers, and the RBI targeting liquidity to boost credit supply.

Over the next few months, we could see more decisive action around resolving the liquidity issues by both the RBI and the government, including the latter working on a separate regulatory body for the NBFCs.

This continued policy reform, lower interest rates, and asset quality improvement at banks, and corporate capex recovering on the back of rising capacity utilisation are longer-term factors to watch.

We also expect the ongoing global slowdown to continue in the second half of this year. If this happens coupled with a more dovish central bank and weaker oil prices, India could benefit on a relative basis.

Q: Are there any sectors that are at risk due to global or domestic factors, and should investors limit their exposure to them?

A: As mentioned earlier, index valuations are not particularly comforting. Therefore, we continue to maintain that this is a stock picker’s market. Investors may have to expand their screens beyond the frontline Nifty names to look for value.

BSE Midcap and Smallcap indices have recovered a tad from their lows, but provide more valuation comfort than Nifty.

In general, the earnings growth environment has not been great over the past few years now. But the areas that still offer some comfort are select quality companies – mostly in the space of private banks, insurance, technology, select energy, industrials, consumer and media.

Q: How are we placed among emerging market peers?

A: Relative to Asian peers, India is trading at a premium to its historical average valuations, while most EM peers are slightly below their mean levels.

That said, several of these peer markets, particularly in North Asia have seen deeper earnings cuts this year as they are more directly exposed to global trade war issues than India.

India still offers reasonable growth compared to its peers, and possibly a wider range of stocks for investors to choose from.

Q: The auto sector has been on the sell list of both MFs and FIIs. Do you think this sector could emerge as a dark horse in the next 12-24 months?

A: Auto demand is currently in a deep recession and that is reflected in the sector preferences of institutional investors.

But, India’s consumption story is strong over the long-term, and hence we believe at some stage, the trade could reverse. That being said, investors will need to be selective in their stock picking.

The sector’s underperformance has been largely led by weak demand environment that is now manifesting in weak margins as well.

There were multiple factors that are behind this including cost increases due to higher insurance prices, new safety regulations, higher oil prices and interest rates and the liquidity crisis.

Although some of these factors have eased recently, we are yet to see a meaningful recovery in consumer sentiment.

Furthermore, the auto industry’s move to tougher emission (BS-VI) and CO2 regulations in the coming years and increasing talk about electric two and three wheelers keeps us cautious.

Q: What is your first take on March quarter results?

A: The March quarter results showed a weakening growth trend on an overall basis, one that has been visible since mid-2018.

They were mixed even relative to our low expectations. Barring a few companies, this was particularly evident in consumer staples and discretionary sectors.

But, we saw better-than-expected results in financials, media and even telcos, and largely in-line results in other sectors including IT services.

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