Nifty Dropped By 15 Points As Market Frets Over Appointment Of New UP CM & Valuations Of Idea Post Merger With Vodafone

Market Wrap: 20/03/2017 (21:00)

NSE-NF: 9157 (-15 points; -0.16%)

NSE-BNF: 21188 (-46 points; -0.22%)

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 9215-9195/9180 zone, NF may fall towards 9140/9115-9075 & 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 9157, just 15 points down after making a session high of 9165 & low of 9142 and respected the 5-DEMA of 9140; but technically its showing lots of exhaustion after a non-stop rally of around 16.7% from Dec’16 low of 7896 to recent high of 9213.

Valuations may be also stretched and around 9200 Nifty, TTM PE may be around 23.90 against Q3FY17 TTM EPS of 385. Another traditional valuation metrics of “Buffet Indicator” (MCAP/GDP) may be also around 1 at current NSE market capitalization of around $2 tln, which is equivalent to India’s current GDP in absolute terms.

As most of the drivers (tailwinds) has been discounted by the market, including better than expected win for BJP in UP election, an expected roll out of GST from July’17 & less hawkish Fed (dovish March hike), market may look for further stimulus in the form of Q4FY17 earnings; meanwhile lack of any meaningful drivers may push it for some time & price correction. Also, an hurried implementation of GST by July’17 may cause more disruptions to the economy rather than any benefit in the short term.

Under such conditions, market will always look for some triggers (headwinds) to correct itself such as:

1.    Fed might be very serious to hike another 2-3 times in 2017, if incoming US economic data is not being terrible; Fed may consider hiking US rate to around 1.5-1.75% equivalent to at least average core CPI of USA (neutral policy rate) by Dec’17 irrespective of trajectory of Trumponomics.

2.    Fed may also consider to shrink its huge balance sheet and may send a clear signal by Dec’17; current terms of Fed leadership may also end at early 2018 (Yellen & Fischer) and if their service will not be extended, market may also fret about new Fed leadership being more hawkish than Yellen.

3.    To keep parity with the hawkish Fed, which is thinking & actually implementing multiple rate hikes, other central banks including ECB/PBOC/BOE and also BOJ may send clear signal about future rate hikes or some hawkish path, including tapering. We may see and end of easy money policy from the global central bankers in the days ahead.

4.    Invocation of Article-50 by UK on 29^th March’17 may also bring back the real Brexit concern along with other EU political risk (France & Germany election).

5.    Capitulation of oil due to increasing supply glut due to US shale oil despite best effort by OPEC & Russia; if production cut agreement is not extended beyond June’17, oil may again fall below $40-35.

6.    Uncertainty of “Trumponomics” and “Trumpomania”.

Among all these ongoing global jitters, Indian market may be also concerned over Q4FY17 earnings trajectory as it will cover a full quarter under DeMo without any exceptions to use/launder the old demonetized notes. As par unconfirmed reports, Q4 advance tax figure may be tepid with an overall growth of around 6%.

Another area on concern may be huge stressed assets of the Indian banking system, which may be now around 17% of gross loans with no signs of actual resolve despite various restructuring efforts by the banks & RBI. Idea of a Govt sponsored bad bank in PPP mode is gaining slow traction, but that may be far away as the decision may also invite some political controversy as “Aam Admi” (common man) may not like the concept of “loan waivers” for the “rich”. Resolution of stressed assets may also require “deep sacrifice” (haircut by around 70%) in some of the big cases of NPA, which may also land the PSBS officers in future trouble with vigilance agencies/CBI after the KFA loan fiasco with IDBI bank former top brass.

Also, idea of a “bad bank” like in US may not work in India as the economy is itself a high cost one with legacy issues of high cost domestic bank borrowing. Decade’s old higher banking lending rate may be one of the primary reasons for today’s huge stressed assets with the Indian banking system beside some of the cases of corporate mismanagement and extreme greed in boom time (pre 2008 era).  

Any “bad bank” idea may be just transfer of stressed assets from the banks (PSBS) to another Govt/PPP entity and that may not solve the real problem even with some management change as long as the basic structural issue is not resolved. Apart from high borrowing costs, excess capacity and relatively lower consumption; i.e. demand/supply mismatch and viability or long gestation period of various stalled infra projects might be the real issues, which the Govt need to resolve by its incremental or big bang reforms.

India is a high tax & interest economy, where apart from very high banking lending rate; tax incidence (both direct & indirect) may be really high and Govt need to resolve it first now having an undisputed political support. In order to enable Indian banks to lend at below 5% rate comparable to global standards. But for that, Indian small savings rate need to be cut drastically and that is again a tough political decision for any democratic Govt. Also, a drastic repo cut by RBI may be also not good for the Indian bond market. Thus, this may be a tough issue to bring down the bank lending rates below 5% at globally comparable rate, although in DM, bank lending rate is much lower.

Traditionally, India may be a saver’s country, where people are more inclined to save for the future rather than spending graciously unlike USA of pre-2008. Indeed, this has saved the Indian economy from capitulation in times of global crisis along with the story of domestic consumption without must reliance on the global consumption (export). Now, after DeMo and the ongoing “war on black money”, this perception may have now changed a bit and the Indian economy need to start the consumption theory in order to kick start its fragile recovery, despite some “green shoots”.

Overall credit growth of the Indian Banking sector may be still very tepid despite all the DeMo related narratives, which was supposed to act as a stimulus for the fragile credit growth of the economy. But in reality, overall banking credit growth may be now around 4% with Private Banks at around 18% & PSBS around 3%. The incrementally lower trajectory of credit growth despite comfortable liquidity in the banking system after DeMo led deposits may be also an indication of lack of quality borrowers or viable projects.

After DeMo and subsequent ReMo & banking withdrawal restrictions, people are again returning to the cash and by next few months, we may see tepid growth in bank deposits except some types of current account holders (such as chit funds etc). People are withdrawing demonetized cash from their bank deposit accounts for apprehension of IT action/harassment and if the Govt will not increase supply of cash to the system, we may also see some cash disruptions again.

Also, Private Banks are now basically desperate to extend personal retail loans as corporate loan demand (wholesale banking) almost dries up; but that may also create a future bubble in retail space as most of the private bankers may be eyeing the same set of “eligible clients”. Immense competition in the private banking retail space may also cause lower NIM and OPM in the days ahead.

At Q3FY17 TTM EPS of around 704, PE of Bank Nifty was around 30.25 at yesterday’s high of around 21300, which may be in significant bubble zone in comparison with the average historical PE of 20.

Median valuation for Bank Nifty at EPS of 704 (Q3FY17 EPS) may be around 14080 (at PE 20)

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

Bank Nifty EPS snapshots:

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. Going forward, 25% average EPS CAGR for the private banks may be also doubtful as they are near a saturation point amid intense competition in the retail banking. Also, bad loan woes of Axis & ICICI bank may be far from over and we may see more stress in the health of PSBS. Also, proposed farm loan waivers in various states apart from UP may be not good for the health of the PSBS/Govt.

While actual EPS growth between FY-15 & 16 is negative (-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.           

In USA, after the 2008 financial crisis, the Govt/Fed has helped various banks as they were “too big to fall” and the QE money were deployed by those US banks in various financial assets classes across the globe, which ultimately saved both of them despite there was no visible credit growth (as there were not much eligible borrowers too!!). In India, such trading/investment in various global financial assets class may not be possible as of now except some domestic treasury & market operations; it’s high time that Govt may think such option by the Indian Banks to revive them as there are now no domestic demands or eligibility for significant credit growth. Basic model of the Indian banking system may have to be changed from only being lender; they have to be also improvised themselves as investment banker although it may be big risk in the Indian context. 

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