BNP Paribas sets 2019 Sensex target at 40,000, but stays wary on earnings

The brokerage is of the view that India's price-to-book value is expensive compared to its Asian peers

BNP Paribas expects the benchmark Sensex to climb to 40,000 next year, implying a 10 per cent upside from current levels. The France-based investment bank, however, has a neutral stance on the Indian markets as the "earnings environment, unlike the macro-economy, hasn't revived yet". China, South Korea, Indonesia and Thailand are the Asian markets BNP Paribas is overweight on. While it has an underweight stance on Taiwan, Malaysia and the Philippines. 

"A reason why we are not underweight India is the ease of stock selection. India still offers a wide range of good quality stocks across sectors consistently generating free cash and excess return," says Manishi Raychadhuri, BNP Paribas’ Asian Equity Strategist.

The brokerage is of the view that India's price-to-book value (P/BV) is expensive compared to its Asian peers. 

"India's valuations also leave little room for error. Sensex P/BV multiples are in line with the long-term average, but they didn't decline with the decline in return on equity (ROE) over past six years, so it would be unrealistic to expect a rerating as ROEs recover. Relative to the average of Asia ex-Japan, India's P/BV is almost one standard deviation higher than the long-term mean," Raychaudhuri says in the note.

BNP Paribas has highlighted how India's earnings growth has consistently belied expectations.

"What further complicates India's earnings picture, in our opinion, is a significant overestimate of the market's earnings growth in 2019 and 2020. We believe India's earnings growth potential is around 14-15 per cent, slightly higher than nominal GDP growth, not 18-21 per cent as the current consensus seems to suggest," the note adds.

The brokerage says the drop in oil prices have eased the concerns of widening current account and a weak rupee. However, it advises against complacency.

"...Given the unpredictability surrounding oil prices and its geopolitics-driven nature, complacency on this issue would be premature," Raychaudhuri says. 

Despite slowdown concerns, BNP Paribas is the most bullish on China due to "potential growth stabilising government policies, cheap valuations and availability of a large stock universe".