Nifty Closed Almost Flat Amid Subdued Global Cues; But Finished FY-17 Almost 18.5% Higher; Bank Nifty Also Rallied Almost 33%

Market Wrap: 31/03/2017 (19:00)

NSE-NF (April): 9198 (+9 points; +0.10%)

NSE-BNF (April): 21483 (-63 points; -0.29%)

For 03/04/2017:

Key support for NF: 9175-9115

Key resistance for NF: 9235-9275

Key support for BNF: 21450-21350

Key resistance for BNF: 21675-21850

Time & Price action suggests that, Nifty Fut (Apr) has to sustain over 9235 area for further rally towards 9275-9350 & 9425-9505 by tomorrow / in the short term (under bullish case scenario).

On the other side, sustaining below 9215 area, NF may fall towards 9175-9140/9115 & 9075-9035/8980 area by tomorrow / in the short term (under bear case scenario).

Similarly, BNF has to sustain over 21675 area for further rally towards 21750-21850 & 21950-22150 area by tomorrow / in the near term (under bullish case scenario).

On the other side, sustaining below 21625 area, BNF may fall towards 21450-21350 & 21150-20950 zone by tomorrow / in the near term (under bear case scenario).

Nifty Fut (Apr) today closed around 9198, almost flat amid a subdued day of trading in the last day of the FY-17 after making an opening session high of 9208 and day low of 9176. Indian market today also opened in a flattish note following tepid global cues despite an upbeat US Q4CY16 GDP data. Although, the headline revised US GDP flashed at 2.1% against expectations of 2% (prior: 1.9%), private/consumer consumption part was tepid despite record consumer confidence and that may one of the reasons for subdued response from the market (USD/US bond yields).

Another important US economic data flashed today was personal spending (Fed-MOM) and that came at 0.1% against expectation of 0.2% (prior: 0.2%), which may be also pointing towards tepid consumer consumption.

Elsewhere, EU zone headline CPI & core CPI also came downbeat and UK GDP flashed as 1.9% against estimate of 2% (prior: 2%). In UK, the subdued GDP and rising inflation may be also an indication of stagflation as a result of a depreciated currency (GBP) and tepid wage growth. All these in turn may translate into weak consumer spending for UK economy. Thus, sentiment of EU market was also subdued today ahead of key EU official response of UK’s Brexit notice. The official EU response may not be so much pleasant for UK as par some leaked drafts.

Back to home, sentiment of Indian market was also subdued in the last day of the FY-17 as there were no fresh drivers. But reports of a cabinet meeting for the resolution of the banking NPA and a good response for the R-Jio’s prime offer (??) has helped the PSBS & RIL significantly today. RIL has closed almost 4% up today, thus helping Nifty immensely by around 20 points itself. Hindalco was also strong rallying around 2.5% today on the back of reports of MIP imposition on Aluminum by the Govt.

Although, PSBS were in upbeat mood today on the hope of some big-bang announcement by the Govt for the NPA resolution, most of the private banks were lagging after a recent stellar rally. PSBS also came under some pressure today after MOS Fin reportedly said that there was no formal proposal of a super ARC (Bad Bank) for the Govt. As par various reports, Govt may give more power to the RBI led supervisory committee to deal with the actual resolution process of the NPA and banks are also preferring for more favourable CDR mechanism from RBI and less provisioning requirement by them. But RBI may not be so much comfortable for more window dressing of the banking stressed assets.

Overall, although market is keeping a great hope on some Govt sponsored big bad bank (super ARC in PPP mode), Govt may not respond in that way at all as beside involvement of tax payer’s money in bailing out the fragile PSBS, there may be also a political angle with it; “Aam Admi” (common/poor ordinary people) may not appreciate any Govt bail out of the “riches”; especially after the DeMo and “farmer’s plight”.

Despite DeMo pain, “Aam Admi” has wholeheartedly supported NAMO as they see it as “plight of riches” and along with that “war on black money/corruption” stance of the Govt has made NAMO as the “friend of the Aam Admi/poor people”. Govt/BJP may not take any further political risk at this point of time by “helping riches” and bailing out the stressed industry/some specific big corporates rather than offering a farm loan waiver or debt relief to the ailing farmers. Thus, a Govt sponsored “bad bank” may be a difficult political proposition as of now and Govt may invite private investments for the same by offering some sops & sovereign guarantee; but considering the huge requirement of capital for stressed assets and project/business viability itself, it may be very tough for such private participation.

At 21700 Bank Nifty, TTM PE is around 30.82 against Q3FY17 TTM EPS of 704, which may be quite expensive, considering its average PE of 20 and actual EPS CAGR of around 8% for the last few years.

For Bank Nifty:

Projected (analysts’ consensus) FY-17 EPS: 959; projected FY-17 median valuation: 19180 (at PE 20)

Projected (analysts’ consensus) FY-18 EPS: 1229; projected FY-18 median valuation: 24580 (at PE 20)

Actual FY-16 EPS: 900

Projected FY-17 EPS at par current trend (run rate): 940 (assuming around 5% CAGR)

Projected FY-17 fair value (median): 18800

Projected FY-18 EPS as par current trend (run rate) assuming around 8% CAGR: 1015

Projected FY-18 fair value (median): 20300

INDEX	Mar '16	Mar '15	Mar '14	Mar '13	Mar '12	FY-12-16	FY-15-16	AVG	AVGR	SGR	PROJ(%)	FY-17	FY1-8
BANK NIFTY	16141.7	18206.7	12824.8	11334.5	10269.8	57.18	-11.34	13158.95	22.67	13.29	9.73	17711.90	19434.84
PE	17.94	19.01	14.31	13.88	15.42	16.34	-5.63	15.66	14.60	4.80	4.46	18.74	19.58
EPS	899.76	957.74	896.21	816.61	666.01	35.10	-6.05	834.14	7.87	7.25	4.46	939.88	981.80
AVG PE	20	20										20	20
FAIR VALUATION	17995	19155										18798	19636
EPS CAGR(%)	-6.05	6.87	9.75	22.61

Analysts’ consensus of 1229 EPS by FY-18 over its FY-17 projection of 959 may be far stretched at more than 28% CAGR despite 20-25% EPS growth trend of the private banks; while actual EPS growth between FY-15 & 16 is negative at -6.05% and on an average EPS growth may be around 8% for the last 5 years, valuation multiple (PE) has grown almost 100% from around 15 to 30 in the same period on the hopes of an imminent earnings recovery, which may be elusive so far.

Looking ahead, apart from Govt’s reform in banking NPA resolution, market may also watch the March’17 Auto sales data, PMI, CPI and also the RBI meet on 6^th April. Auto sales may surge on the back of huge discounts being offered by the auto dealers/cos for the banned BS-III vehicles issue from 1^st April’17.

RBI is expected to be on neutral mode not only for April’17, but may be also for the rest of FY-18 as there is not so much scope of further rate cut transmissions by the banks without drastic cut in small savings rate by the Govt and expected multiple rate hikes by Fed in 2017-18. RBI may also take a hawkish tone, considering likely higher trajectory of core or even headline inflation for a probable deficient monsoon this year and any GST related supply side disruptions & its initial adverse effect on overall inflation. Instead of rate cuts, RBI may focus more on stability of INR and USDINR real bond yield differential in the back drop of a hawkish Fed and to attract consistent FPIS inflows in to the Indian bond market to fund Govt fiscal deficit or to support incrementally higher Govt capex as private capex is still tepid.

SGX-NF