Mid-caps will outperform: BNP Paribas

BNP Paribas says frontline stocks appear to be fully valued and stocks of mid-cap and Tier-II companies could continue to outperform in the near term.

It cited Bank of India, Ashok Leyland and Exide as three examples.

It said valuation is not a big concern in India as earnings estimates are moving up.

BNP PARIBAS INDIA STRATEGY

Bull rally in Indian markets

P/E is 16.5x one-year forward earnings

Over the past month

Sensex EPS FY10 up from Rs 845 to Rs 868
Sensex FY11 EPS up from Rs 979 to Rs 1,000

Concerns

Equity issues could suck allocations out of FIIs and DIIs
Could reduce flows into the secondary market
Over the past month, more than $2b equity has been raised either through sale of promoter stakes or through equity issuance by companies through QIP
Another $8-10 bn may be issued in the near term

Not size, quality of some issues is worrying

55% issues in the pipeline are for realty, construction companies
Some haven’t indicated where they will deploy issue proceeds

PSU divestment, a double-edged sword

Divestment positive from India’s fiscal balance
Negative if offerings from PSUs coincide with private sector
Believes the risk of this occurrence is low
PSU divestment could take longer than 1-2 quarters