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BNP Paribas’s model portfolio is overweight on IT, autos and pharmaceuticals

BNP Paribas, in a recent note to clients, recommends exposure to ICICI Bank, LIC Housing Finance, Sun Pharma, M&M and Wipro, while it has dropped IDFC from its model portfolio. Strangely, the portfolio recommends greater weight for sectors it recommends as underweight and suggests Reduce for stocks which are listed as Buy!

BNP Paribas Securities Asia (BNP Paribas) has recommended adding ICICI Bank, LIC Housing Finance, Sun Pharma, Mahindra & Mahindra (M&M) and Wipro to the portfolio, in a recent strategy note. At the same time, it has dropped IDFC and reduced its exposure to Tata Motors, HDFC and NTPC. However, the investment bank seems to be unsure about the direction of India’s economy as well as the market, and has therefore taken a somewhat neutral stand—like many others. The report says, “Indian equities are at the crossroads. On one side there are potential catalysts for further upward movement. On the other, post significant outperformance, India appears fully valued relative to its own history and slightly overvalued relative to peers in India.”

In the light of Reserve Bank of India’s (RBI) decision to cut repo rates by 25 basis points (bps), BNP Paribas believes that RBI will cut the rate by 75 bps more by calendar year end. The report said, “Potential catalysts for an upward move are well understood. India could be the only large Asian country to have benign monetary policy in 2013. With weak growth and inflation trending down, RBI has some room to cut rates—we expect RBI to cut the repo rate by 75 bps in 2013.”

Indeed, this is a bold call given that inflation is still a concern because supply side concerns continue to persist due to inaction from the government. Unless the government removes supply side bottlenecks, reducing interest rates further will be fraught with risks.

BNP Paribas is bullish and overweight on IT, utilities, engineering & construction, pharmaceuticals. It believes that a crucial catalyst would be government reform measures, especially in the power sector. It is also bullish on IT, oil & gas and telecom. The report said, “Despite some recent earnings disappointments, the overall earnings environment appears stable. We believe we may be going through the last leg of earnings downgrades in some sectors (auto, infra, PSU banks), while some other sectors (IT, oil & gas and telecom) could see earnings upgrades. Implementation of proposed reform measures (e.g. coal pooling in the power sector, Cabinet Committee on Investments) could turn out to be significant catalysts.

Surprising Labels

While BNP Paribas strategists are entitled to their views, the model portfolio is a model of confusion:

  1. It is ‘overweight’ on automobile sector and has attached a 9% weightage while at the same time it has put a 9% weightage on energy in which it is ‘underweight’! Similarly, it is ‘overweight’ on utilities even though the segment constitutes 4% of the portfolio!
  2. Its maximum exposure is the banking segment of which it has 28% exposure but is neutral on the sector. This is possibly a defensive strategy, but still confusing nevertheless.
  3. When it comes to individual stock picking, it suggests ‘reduced’ exposure to HDFC and NTPC, believing these companies are “fully valued”. However, both stocks have ‘Buy’ ratings!
  4. Another confusing aspect is if you look at their IT portfolio. It is ‘overweight’ on the sector, yet two stocks namely TCS and Infosys have ‘hold’ ratings. This would suggest that investors should pile up on Wipro only, which would mean exposure to the IT sector will hinge on a single company!

It is also surprising to see it play the sentiment game with Hindustan Unilever while at the same time believing its fundamentals are intact (despite earnings disappointment). The report says, “Even though HUL’s volume growth in the recent results disappointed and higher royalty payments to the parent were not welcome by the market, our analyst believes the recent de-rating has opened up a buying opportunity.” The stock forms 3% of the BNP Paribas “model portfolio”.

Please click here to read other stock market news analysis by Moneylife.


EMIs set to come down; banks to cut lending rates soon

Following the rate cut by RBI, bankers have indicated a reduction in interest rates for both lending and deposits


Mumbai: Borrowers can now look forward to their equated monthly instalment (EMIs) coming down soon as leading bankers on Tuesday said they will pass on the benefit of Reserve Bank of India (RBI) reducing its short-term lending rate and cash reserve ratio (CRR) to customers, reports PTI.


Bankers, however, did not say by how much or how soon they will reduce their lending rates.


Stating there is room for monetary transmission, State Bank of India (SBI) chairman Pratip Chaudhuri said, “The overall cost of funds gets lowered by Rs300 crore following the CRR cut which we will pass on to our borrowers without compromising on the net interest margin (NIM).


“But how and in which pocket will it be, would be decided soon. Our ALCO (risk management committee in banks) will be meeting tomorrow to finalise the details,” Chaudhuri told reporters.


Indicating a cut in base rate, Chanda Kochhar of ICICI Bank said there is going to be a transmission on the lending side, while on the deposits front, it will be wait-and-watch.


“There is going to be a lag but we will not take a hit on NIM. The cuts are positive for EMIs.”


Hinting that her bank has no immediate plan to lower deposit rates, she said, “It is not necessary to assume that deposit rates will come down with reduction in the lending rates.”


HDFC Bank managing director and chief executive Aditya Puri said, “The 25 bps reduction in the CRR will benefit us to the tune of Rs70 crore and there will be a rate cut. A case for transmission is there.”


Punjab National Bank’s KR Kamath, while welcoming the rate cuts, said there was a case for transmission but that hinged upon better numbers by the bank.


RBI earlier in the day cut CRR, the part of deposits banks have to keep with the central bank, by 0.25%, releasing Rs18,000 crore into the system.


Indian Overseas Bank CMD M Narendra, however, said it is a challenge for banks to pass on the benefits.


Narendra said that growth-inflation dynamics in the current quarter will decide whether the regulator will follow this up with further cuts. “Against this, recovery in growth is expected to be gradual through 2013-14, which again depends on global commodity price trends.”


“It will be, therefore, a challenge for banks to pass on the benefit of the rate cut to push growth and consumption demand without impacting the already slowing deposit growth,” he said.


Bank of Baroda chairman and managing director SS Mundra, however, said there will be an impact on his NIMs as lending rates come down without repricing of the deposit rates. He did not say whether there will be a cut in the lending rates.


SBI managing director A Krishna Kumar said, “a rate cut is likely. Rates on both advances and deposits may come down.”


According to Canara Bank executive director AK Gupta, the bank would consider interest rate cut in the light of RBI policy action.


Echoing the views, Bank of India executive director N Seshadri said most banks are likely to transfer the rate cut.


“Full transmission will happen on both lending and deposit rates. A 25 bps cut is most likely,” he said.


On poor deposit growth, about which governor D Subbarao expressed concerns while unveiling the third quarter monetary policy review in which he cut the repo and CRR rates by 25 bps, Chaudhuri blamed this partly on the flight of deposits to mutual funds.


“We have seen a flight of deposits as mutual funds are better on taxation and liquidity management,” he said.


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