BNP Paribas expects the Sensex to touch 50,500 by the end of 2021 as the research firm retains an ‘overweight’ rating on India, citing persistence of market leaders and quality stocks.

India continues to benefit from two phenomena—big stocks are getting bigger and the availability of quality stocks in relative abundance compared to its Asian peers, BNP Paribas said in a note. The research firm’s target for the Sensex implies a 10% upside potential from its current level.

“We continue to focus on quality and market leaders in India,” Manishi Raychaudhuri, Asia equity strategist at the firm, said in the note. “Consumer stocks benefitting from domestic rural demand and service exporters benefitting from reviving global deal flow shall continue to dominate the investment landscape.” Raychaudhuri also expects private banks and insurance companies to continue benefitting from market share gains.

India’s equities tracked their global peers in the worst selloff since 2008 after the coronavirus outbreak. But they have since erased losses, riding on the optimism from a quicker-than-expected economic recovery, a potential Covid-19 vaccine and foreign inflows, to trade positive for the year as well as scale new peaks. The rally even prompted Morgan Stanley to hike its target for the Sensex to 50,000 by the end of next year, citing that “the coming growth cycle is not fully priced in”. The Sensex has recovered more than 20,000 points from its 52-week low of 25,638 hit on March 24. The 30-stock gauge is currently trading at a price-to-earnings ratio of 33.36 times.

“Compared to China, India had a relatively late impact from the Covid-19 outbreak and is going through a corresponding late recovery. In fact, the recovery, though visible in some segments of the economy, is absent from urban consumption or banks’ asset quality,” BNP Paribas said.

Raychaudhuri expects reforms like the proposed changes to the agriculture marketing laws, changes in labour laws and the production linked incentives scheme offered to 10 sectors to have an impact over the long term.

Some Key Takeaways

  • Most high-frequency indicators like auto sales, steel and cement consumption are at or higher than pre-Covid levels.
  • In some pockets of discretionary consumption like passenger vehicles, feedback from manufacturers indicates not just inventory restocking but also a genuine uptick.
  • A strong expansion in area under summer crop cultivation aided by a well spread out monsoon has been an important driver of rural incomes.

Still, BNP Paribas expressed concerns over India’s growth recovery due to a lag in urban income, high inflation and quality of bank balance sheets.

“The concerns arise, in our opinion, from still sagging urban incomes, persisting high inflation and the questionable quality of banks’ balance sheets, especially the risks they could face from their retail loan basket,” Raychaudhuri said in the note.

The Covid-related disruptions, according to the note, have had a much more pronounced effect on urban employment destruction and income compression. “The consequent decline in urban propensity to consume non-essentials is not surprising, but worrying nonetheless.”

BNP Paribas also highlighted elevated inflation as a concern, although it doesn’t expect the Reserve Bank of India to hike interest rates. “The resultant likely moderation in headline CPI inflation should provide some breathing space to the RBI, but on the whole, inflation and its impact on monetary policy is an area that we shall keenly watch.”

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