BNP Paribas upgrades India, raises December Sensex target to 42,000

BNP Paribas upgraded India to ‘overweight’ from ‘neutral’ on April 1 and also raised its December-end target for Sensex to 42,000 from 40,000 earlier, which translates into an upside of little over 8 percent, citing stability in earnings and fund flows.

The global investment bank downgraded India from overweight to neutral in June 2018 on concerns about downward earnings revisions, likelihood of currency depreciation amid increasing oil prices and unjustifiably high premium valuations relative to Asian peers.

“The first concern with regards to earnings momentum appears clearly behind us. Earnings downgrade momentum has declined, though growth estimates in some sectors still appear overstated,” Manishi Raychaudhuri, Asia Pacific Equity Strategist at BNP Paribas said in a report.

“However, private capex appears set to revive and the worst of banks’ asset quality problems seem a thing of the past. Strong flows driven by the expectation of the NDA government continuing after the general elections could keep valuations elevated,” it said.

Global investment banks have started raising their outlook for Indian market. Goldman Sachs and Morgan Stanley raised their outlook or target price for Indian market in March which is a strong signal for the bulls.

Just last month, Goldman Sachs upgraded India to overweight and placed a 12-month target of 12,500 for the Nifty which translates into an upside of a little over 7 percent from April 1 closing level.

The global investment bank raised the rating to overweight given sharp underperformance in Jan-Feb, better 3Q earnings, and a pick-up in FII positioning from lows amid rising market expectations of a potentially stable govt.

Earlier, Morgan Stanley in a report said that the market could start pricing in stronger poll outcome in coming weeks, and the broader market will likely outperform rise in Nifty.

In the base case scenario, Morgan Stanley has put out a target of 42,000 on the Sensex for December 2019. The brokerage firm expects earnings growth to accelerate to 29 percent in FY19, and 26 percent in FY20.

Currency woes over, earnings growth to stabalise:

Another big concern for BNP Paribas was depreciation in currency, but the recent rally seen in rupee against the US Dollar put to rest most of the concerns regarding sharp depreciation as rupee went from Asia’s weakest to strongest currency.

The currency concerns appear to be behind us consequent to flow recovery and revival in some macroeconomic variables seem to be paving the way for some degree of earnings stabilisation, said the BNP Paribas note.

The global investment is of the view that earnings growth estimate of 14-16%, which is slightly higher-than-expected nominal GDP growth in these years, is more credible, and growth estimates in financials, consumer discretionary and healthcare appear too high.

“That said, a couple of macro influencers of earnings are clearly on the mend. The long-awaited private capex cycle appears set to commence, especially after the general election outcome, when political uncertainty should no longer hold back companies from finalizing their investment decisions,” it added.

FII flows to continue:

General elections are usually an important influencer of short-term returns from Indian equities and FII flows into the markets. The flows prior to the elections are obviously influenced by the expectations of the outcome.

“The expectation of a “market-friendly” government leads to FIIs’ preference for India over other Asian markets. If such expectations are met, as was the case in 2014, FII euphoria continues for 1-2 months and usually begins to fade by the third month after election results,” said the BNP Paribas report.

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Source: Moneycontrol