BNP Paribas Sees Nifty At 19,250, By March 2024, Stays Cautious
"We have seen a large P/E expansion in the Indian market and we think some more time correction is likely," the report said.
BNP Paribas has set Nifty target at 19,250 levels for the 2024 fiscal while retaining their cautious stance on Indian equities.
"Our Nifty target of 19,250 indicates an approximate 8% upside from current levels in 15 months, which is relatively weak and slightly below what certain fixed income instruments are now offering," Kunal Vora, head of India equity research at BNP Paribas told BQ Prime.
The research firm is overweight on financials, IT and telecom, while being underweight on industrials and domestic consumption space such as staples, discretionary/retail and auto.
Even as the International Monetary Fund (IMF) expects India to be one of the fastest-growing large economies with improving economic fundamentals in 2023 and India emerged as one of the best-performing markets globally in 2022, BNP Paribas highlighted that India's Nifty 50 delivered 4% in INR terms, while falling 6% on a USD basis in terms of absolute returns in 2022.
While India's FY23’s fiscal position looks intact with more than budgeted nominal gross domestic product growth and buoyant direct tax and GST collections and the worst of the pressure on current account deficit and INR depreciation pressure seems likely behind with the moderation in energy prices, China’s reopening and rising fixed deposit rates could weigh on equity flows, it noted.
In CY22, foreign portfolio investment selling was offset by domestic inflows in CY22 amid low term deposit rates. Retail investors continued preferring SIPs to invest in mutual funds. However, retail inflows in Indian equities have moderated since June 2022 (barring September 2022), coinciding with the rise in term deposit rates. This is in line with their global expectation that a higher fixed-income rate will move money away from equities.
BNP Paribas expects the volatility in foreign institutional investors flows is likely to continue in 2023. It noted that FIIs chase lower valuations in underperforming markets/asset classes, like China and Europe, before India. "With China reopening and India’s elevated valuation premium, we see a risk of FII outflows in 2023."
Also, India’s current valuations look rich. At the current differential in yields of bonds and earnings, market returns have historically been negative over the next year.
"In our base case we are not forecasting a decline but we see this as an indicator to be cautious on the market," Vora told BQ Prime.
The report noted that while valuation premium to Asian peers has come off from the peak, it remains well above historical average. "Since 2015, as interest rates moderated, we have seen a large P/E expansion in the Indian market and we think some more time correction is likely."
BNP Paribas said that they prefer a bottom-up approach to stock selection for their model portfolio.
BNP Paribas is overweight on structural growth stories like IT and telecom, cyclical plays such as financials and consider consumer durables to be a tactical buy.
They remain cautious on industrials and the overall consumption space- autos, consumer staples and discretionary on valuation and demand concerns.
Their sectoral outlook on energy, pharmaceuticals and healthcare, materials, cement and utilities is neutral.