Nifty Closed Almost Flat In Another Day Of Consolidation Supported By Positive Global/EU Cues; But Dragged By Pharma & Banking Woes

Market Wrap: 21/03/2017 (19:00)

NSE-NF: 9155 (+1.45 points; +0.02%)

NSE-BNF: 21110 (-73 points; -0.34%)

Vital support for NF: 9105-9035

Vital resistance for NF: 9195-9275

Vital support for BNF: 21000-20900

Vital resistance for BNF: 21400-21500

Time & Price action suggests that, Nifty Fut (March) has to sustain over 9235 area for further rally towards 9275-9350 & 9425-9550 for tomorrow/ in the short term (under bullish case scenario).

On the other side, sustaining below 9215-9195 zone, NF may fall towards 9140-9105 & 9075-9035/8995 area for tomorrow/ in the short term (under bear case scenario).

Similarly, BNF has to sustain over 21400 area for further rally towards 21500-21675 & 21855-21950 area for tomorrow/ in the near term (under bullish case scenario).

On the other side, sustaining below 21350-21250 area, BNF may fall towards 21000-20900 & 20800-20600 zone for tomorrow/ in the near term (under bear case scenario).

Nifty Fut (March) today closed around 9155 almost flat after a moderate day of volatility in which it made an opening minutes high of 9172 & subsequent session low of 9114 and respected the 10-dema (9105 as of now). 

The Indian market today opened in a positive tone following brightening prospect of a July’17 GST launch after union cabinet yesterday cleared the four GST bill. The sentiment was further boosted in the morning Asian session after liberal candidate Macron looked more convincing than the extreme rightist candidate Li-Pen (anti EU) in a televised election debate in France. 

As of now, Macron is leading with around 20% than its prime rival Li-pen, which has also diminished the French election risk to a great extent and consequently global/EU market sentiment was also boosted and that helps the Indian market to recover from some loses at the last hour of trading today.

But, overall sentiment of the domestic market was somehow tepid today after another incident of import alert by US FDA on Divis Lab, some product approval issues with DRL and a product pricing case in USA with Sun Pharma. Overall, going by the repeated actions by US FDA on Indian Pharma companies, analysts are quite worried about the future prospect which may be uncertain and considering strict quality control criteria (CGMP) of the US FDA, these Pharma companies may have to incur substantial cost/capex to improve its standards/protocol, if they want to do business in USA. At the same time, other foreign drug regulators may also take similar action like US FDA and thus going ahead, market/investors might have less confidence on the Pharma sectors as their earnings may be severely affected.

Another area of concern is Indian banking space, specially the PSBS and some old private banks (ICICI, Axis). Apart from the ongoing concern about farm loan waiver rhetoric by BJP in UP, analysts are also worried about their tepid loan growth, which in turn may affect earnings adversely in the coming quarters. Also, other new generation private banks like Indusind, Yes, Kotak may not be able to grow at perpetual 25-30% CAGR years after years and there may be stagnation in the face of growing competition and lack of sufficient eligible & quality retail borrowers.

Yes bank was also down today by around 2% after market buzz of its QIP at steep discounted price for around 1350/-, which was previously cancelled last year after some controversy (poor response?); although the banks has denied today any decision regarding its QIP. After big merger between different SBI groups with its parent (SBI), various private banks may be also exploring some idea about M&A like in telecom spaces and Kotak bank may be in the forefront.

Idea was again down today to 93 after yesterday’s epic fall from around 123 as confusion regarding intrinsic valuation of the merged entity with Vodafone is going on. As par some analysts, ideal valuation may be somewhere between 90-110, and as par the merger math with Vodafone, it may be around 72; thus investors are quite confused considering the stock’s consolidated EPS (Q3FY17 TTM) of around 1.40 and an industry (telecom) average PE of 20; even considering the future bright prospect (?) of the merged entity and an expanding PE of 40 & an EPS of 1.50-1.60 by FY:18-19, fair valuation might be around 62; in FY-17, it may report an EPS of around 0.05 as par present trend.

Overall, merger between Idea & Vodafone might be an obligation to counter R-Jio’s deep pocket and aggressiveness, but it may take significant time till FY-19 for the actual merger and operational synchronization and its effect on the earnings. Vodafone may be making a backdoor entry with Idea for its listing in India, but considering Vodafone’s conservative marketing policy and inertia, even the combined entity may not pose any serious problem for R-Jio or to even Bharti Airtel, unless Vodafone changed its marketing policy. Also lack of sufficient 4G spectrum may be another headwind for this merged entity.

Indian market today was pre-occupied the D-Mart IPO listing which scored a maiden century on its D-day itself, gaining by more than 117% at around 650/- against IPO price of 299/-. But, analysts are quite worried about the valuation, which may be highly expensive at an projected FY-17 EPS of around 8.35, which is translating of a PE around 78 at today’s high of around 650/-.

Projected FY-18 EPS of D-Mart may be around 11.20 and at 650, projected FY-18 PE may be also stretched at around 58. But, the company may be also an exception in the organized retail format, which is growing around 35-40% CAGR for the last few years, whereas Future retail with an EPS of 7.12 is commanding a PE of around 35 (industry PE of around 40). Considering saturation in growth and conservative management & the euphoric investor sentiment, a median PE of 50 may be appropriate for D-Mart as of now and in that scenario, a median valuation of around 417-560 (8.35*50 & 11.20*50) may be ideal for D-Mart in the coming days (Projected For FY: 17-18 at consensus EPS).

The euphoric sentient about D-Mart IPO may be also an indication of the extreme greed level of the Indian market currently which may be another sign that market may be topping out and technically also, the corrective 4^th wave may have started in the EW cycle, provided Nifty sustained below 9275 in the coming days; otherwise the expansive current 3^rd wave may further extend towards 9505 zone.

As reflation trade theme is gradually diminishing in US/global markets amid fall in USD and uncertainty over Trumponomics & supply glut/fall in Oil, probability of an impending time & price correction of the Indian market may be more from here.

 SGX-NF

 BNF