India is well placed within EMs from an investment perspective: BNP Paribas

India has handled the pandemic rather well, companies have become more efficient, and there is a cyclical recovery underway, said Abhiram Eleswarapu, head of equities at BNP Paribas India

With the markets scaling record highs, most analysts now expect earnings to catch up to support lofty valuations as economic activity stabilises. ABHIRAM ELESWARAPU, head of equities at BNP Paribas India tells Puneet Wadhwa in an interview that they remain ‘overweight’ on India within the Asia ex-Japan universe for its corresponding late recovery as compared to other markets such as China. Edited excerpts:

What is your stance and outlook for Indian equities?

We remain constructive on emerging market (EM) equities for 2021, based upon the wide availability of Covid vaccines by the second half of the year (H2-21), continuing reflationary trends, and our expectations of moderation of the US dollar (USD) against EM currencies. Monetary policy will likely err on the side of being accommodative through 2021 and 2022, and US President Biden’s tenure could see fewer geopolitical risks – thus supporting risky assets.

We are ‘overweight’ on India within the Asia ex-Japan universe for its corresponding late recovery as compared to other markets such as China. In fact, Indian earnings continue to be upgraded given we had two consecutive above-expectations earnings seasons. That said, the markets have run up quite a bit and past our S&P BSE Sensex target of 50,500 (this target was set late last year), and therefore it wouldn’t be surprising to see a few bumps along the way.

Do you see a more broad-based participation now?

Yes, that is correct. Last year our research team coined the term “BHARATH” for a selection of companies that they see as businesses of today and tomorrow, and those that have a strong connect with India. These stocks outperformed through much of 2020. However, since late last year as the recovery started to look more real, the rally has broadened quite a bit to include mid-and small-caps. Even within sectors, we see investors rotating out of more expensive names to cheaper ones, for example, such a switch is quite evident in the shift from private banks to PSU banks of late. The areas we like are financials – especially private banks, insurance and housing finance companies, select undervalued public sector undertakings (PSUs), property, IT services and select names in energy and consumer.

Has the budget provided enough incentive to investors to look at equities?

We think that India is well placed within EMs from an investment perspective. India has handled the pandemic rather well, companies have become more efficient, and there is a cyclical recovery underway. The budget gave the conclusive push needed to re-establish the long-term story with its emphasis on infrastructure capex, reducing banks’ asset quality issues, healthcare spending, and incentives for foreign and domestic investments. At the same time, the assumptions were credible and a realistic fiscal path was laid out. While the budget did not have specific incentives for equity investors, it offered an undertone of stability and predictability, which has encouraged market participants.

Will investors exit consumption-driven sectors for capex-driven plays?

I tend to agree with this. Typically, investors tend to play the reflation theme via housing, financials and capex-driven sectors than through consumption. The budget clearly indicated a push towards a multi-year capex cycle. There are also incentives for new manufacturing projects starting before 2023 and through the Production Linked Incentive (PLI) scheme. The commercial vehicles segment is a good example of a potential beneficiary and has a high correlation with the GDP growth. On inflation, fast moving consumer goods (FMCG) companies have highlighted the pressure on gross margins because of rising soft commodities and crude prices, though some of them also have sufficient pricing power to pass these costs. Auto companies, on the other hand, have seen sharp input cost inflation and so far they have shown caution in passing on all of this to customers.

What are the key risks to the market rally?

The risks are potential vaccine transmission delays or side effects, and earnings over-optimism considering the broad consensus seems to be of a rather quick return to pre-Covid like conditions. Valuations are a worry too, but could be a bigger concern is earnings upgrades come to a halt.

Expectations from India Inc’s earnings?

Financial year 2021-22 (FY22) could see a sharp earnings rebound of around 25 per cent y-o-y growth from the lows of FY21. In FY23, we could return to more ‘normal’ levels of operating earnings growth of mid-to high-teens, and potentially higher at the earnings per share (EPS) level if interest rates continue to remain low. Financials and cyclical sectors are likely to lead the recovery.

Can you elaborate on your stance for the financial sector?

The sector is poised for a continued re-rating led by stronger bank balance sheets, recovering demand and a growth-oriented budget. Stock valuations, barring those of the largest banks, are not particularly expensive relative to their history and versus that of the overall market. It would not be surprising to see several financials companies report over 50 per cent earnings growth next year, further aided by normalisation of credit costs. Diversified financials and select PSU banks look particularly interesting from a valuation perspective.