Indian markets will continue to become narrower: BNP Paribas

The universe of investible stocks is getting narrower, if BNP Paribas is to be believed, which suggests there is a lack of confidence in mid- and small-cap stocks. India has been unable to create businesses of global scale for the large part, which has led to the creation of ‘people-centric businesses,’ it said. The foreign investment bank is of the view that the Indian markets will continue to get narrower.

In its latest report, BNP Paribas said, “Our evaluation of Nifty returns over the last 18 years showed that the market has been getting narrower as fewer stocks drove a large part of the market performance, showing a lack of confidence in mid and small cap names. We do not see this trend reversing anytime soon.”

The French bank said India’s inability to create businesses of global scale has led to the formation of people-centric businesses, which have either successfully positioned themselves within the Indian market to be successful businesses of tomorrow, or have had business models with the potential to touch a billion people.

Stocks such as Bharti Airtel, HDFC Bank, HDFC Life, Asian Paints, and Reliance Industries among others are part of BNP Paribas’ collection of stocks called ‘Bharath’ and it believes that such stocks have potential to deliver an upside of 16.7% despite the recent rally.

BNP Paribas expects the Sensex to hit 41,500 by the end of the current financial year and that there is no material downside in the markets from current levels. In the near-term, the market may have slightly run-up ahead of its fundamentals, said BNP Paribas.

The foreign bank also said it sees a limited potential downside of 9%. Amit Shah, head of India equity research, BNP Paribas, in a virtual conference, said: “We are at a stage where it seems that the liquidity rally can continue for a while, but fundamentals are stretching itself. India is one of the few countries where ETF outflows have been met by institutional active fund inflows. In the event that ETF flows come back, round one will go to quality names which are fairly valuation exhaustive.”

The report mentioned that work from home is a new theme that is emerging in the post Covid-19 world and the IT services sector is best positioned to gain from it. The industry could see earnings before interest and tax (EBIT) gains of up to 2% to 5% for large companies even if they are able to retain half of the cost savings over the medium term.

Telecom, too, will likely remain strong on the back of the work from home transition due to market consolidation, higher barriers to entry and increasing usage driving average revenue per user.

Financials are also likely to see a 20% reduction in existing office rentals and related expenses, or a combination of work from home, which would lead to a lower office space requirement, translating into a 127 bps benefit to the cost income ratio of the Indian banking system on a per annum basis, according to the report.

Conversely, BNP Paribas said sectors such as oil and gas as well as real estate could be adversely hit. Work from home would lead to a fall in occupancies and decline in rentals. Additionally, auto fuel demand is also likely to take a 5% to 9% hit in the next three to five years because of the transition to work from home.