BNP Paribas sees India underperforming EM peers in 2023, excludes ITC, Infosys

BNP Paribas expects Asian equities to outperform developed markets in 2023, but has downgraded its rating on India to “neutral” from “overweight” due to stretched valuations.

Within the emerging market pack, BNP Paribas expects India to underperform other markets against the backdrop of the steep up-move seen in 2022.

Currently, the BSE Sensex is trading at 3.03 times its one-year forward price-to-book value, which is equal to its 5-year average price-to-book value.

Valuation of Sensex is the highest among the emerging market peers, all of whom are trading at 0.9-1.7 times their 1-year forward price-to-book value, the brokerage said in a note.

Therefore, BNP Paribas sees limited upside potential for both Sensex and Nifty 50 in 2023. Its 12-month target of 66,000 points for Sensex and 19,650 points for Nifty 50, implies a potential upside of 5% from the current levels.

On Tuesday, Nifty 50 ended 0.6% higher at 18,608 and the Sensex settled at 62,533 points with 0.7% gains.

Year-to-date, the MSCI India index has risen more than 7%, whereas the MSCI Emerging Market index has fallen by a sharp 11%.

India’s cyclical growth recovery, improved corporate balance sheets, and strong FDI offered regional investors a large, liquid and safe option.

“India’s structural robustness seems indubitable but, tactically, valuations look stretched,” Manishi Raychaudhuri, head of equity research - Asia Pacific, said in his 2023 outlook report.

“We have assumed a mild rerating from the present levels for Greater China, and a more significant derating for India,” he added.

BNP Paribas expects China and Hong Kong equities to see a sharp rebound in 2023. Its 1-year targets for Hong Kong’s Hang Seng Index and China’s Shanghai Composite Index implies an upside of 12% and 13%, respectively, from the current levels.

“While many of the supportive factors still exist, relative valuations across markets are starkly different now than in the beginning of 2022 and, more importantly, the domestic drivers in Asia’s largest market – China – are beginning to change,” Chaudhuri said.

Sectoral Bets

BNP Paribas expects earnings growth for India Inc to be in the 15-19% range in 2023 and 2024, against the backdrop of the economic momentum.

But earnings estimates in some sectors like consumer discretionary and industrials appear over-stated to the brokerage.

“Consumer staples could face earnings estimate downgrades, too, owing to margin pressures from input cost inflation,” it said.

For the consumer staples companies, the brokerage expects an over 16% growth in the earnings per share in 2023, against 13% in 2022. For 2024, the growth is expected to slow down to 14.3%.

The brokerage has downgraded consumer staples to “neutral” from “overweight”, and has excluded ITC and Britannia Industries from its model portfolio after the recent run-up in the stocks.

The brokerage has booked profits on both the stock and is moving more into the Indian healthcare segment through Fortis Healthcare.

Fortis’ profitability has improved from 14-15% in FY20 to 18% in the first half of the current financial year, and BNP Paribas sees it moving to 20% by FY25.

Apart from consumer stocks, BNP Paribas has also reduced exposure to the Indian technology sector and removed Infosys from its portfolio, while retaining exposure to TCS.

“In an environment of likely recession in the US and Europe, valuation and earnings of globally-linked IT services could come under pressure,” it said.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)