Market Wrap: 25/10/2017 (17:00)
NSE-NF (Oct):10290 (+70; +0.69%)
(TTM PE: 26.67; Abv 2-SD of 25; TTM Q1FY18 EPS: 386;
NS: 10295; Avg PE: 20; Proj FY-18 EPS: 418; Proj Fair Value: 8360)
NSE-BNF (Sep):24993 (+755; +3.12%)
(TTM PE: 28.42; Abv 2-SD of 25; TTM Q1FY18 EPS: 881;
BNS: 25036; Avg PE: 20; Proj FY-18 EPS: 961; Proj Fair Value: 19220)
For 26/10/2017: (FOR NF/NS & BNF/BNS)
Key support for NF: 10270-10215/10150
Key resistance for NF: 10325/10380-10430
Key support for BNF: 24850-24500
Key resistance for BNF: 25100-25250
Hints for positional trading:
Technicals indicate that, NF has to sustain over 10380 area for further
rally towards 10430-10505 & 10600-10675 area in the short term (under
bullish case scenario).
On the flip side, sustaining below 10360 area, NF may fall towards
10325-10270 & 10215-10180/10150 area in the short term (under bear case
scenario).
Similarly, BNF has to sustain over 25100 area for further rally
towards 25250-25500 & 25600-25775 area in the near term (under bullish case
scenario).
On the flip side, sustaining below 25050 area, BNF may fall
towards 24850-24500 & 24300-24000 area in the near term (under bear case scenario).
Indian market (Nifty Fut/India-50)
today closed around 10290, surged by almost 70 points (+0.69%), as market
cheered in style on Banks/PSBS recap booster
dose announced yesterday by the Govt as a part of fiscal stimulus to dig out
the economy from its deepest slump since 2014 after DeMo & GST blues.
Indian market today opened around 10335, gap up by almost 1.10% at another milestone high on Govt’s “innovative” recap plan for
the PSBS and certain other fiscal stimulus measures (total around Rs.9 tln) in
infra/road building without hurting fiscal discipline too much; it made a day
high of 10351 in the opening minutes ticks, but soon after succumbed under
selling pressure/long unwinding and made the day low of around 10248.
There was a Reuters’ economist poll (Oct), which shows that for
FY-18, GDP may be around 6.7% vs 7.3% prior; Average CPI may be around 3.5% vs
3.5% in FY-18 and 4.5% vs 4.3% in FY-19; RBI to be in neutral mode till at
least Q2FY19 and hold rates at 6%.
The survey was taken before yesterday’s “historic” announcement
by the Govt for the Rs.2.11 tln (around $32.40 bln) PSBS recapitalization,
largely by issuing some kind of recap bonds for Rs.1.35 tln to bail out the
PSBS along with earlier committed/budgeted Rs.0.18 tln by the Govt under
Indradhanush; rest of Rs.0.58 tln will have to arranged by the fragile PSBS
from the market or by selling non-core assets (deleveraging).
Also, majority of the Reuter’s economists’ poll has the view
that Govt had imposed too many sweeping changes to the economy in a short
period of time (DeMo & GST) and thus it may take significant time for
recovery.
Although, the PSBS recap may be termed as a “game changer” in addressing
the NPA fiasco, weak B/S of the state run banks (PSBS), slowing growth, muted
credit off take and tepid private investments, it may also poses certain risks to
the economy (bond coupon payment/fiscal prudence/Indian accounting rules) &
also politics, as it involved bail outs of certain stressed
corporates/defaulters by way of hefty haircuts (partial loan waivers). This may
also encourage more defaults/disclosures in the banking system later on.
The PSBS recap fund of Rs.2.11 tln is around 1.3% of India’s GDP
and is expected to spur Indian economic activity within one year of
implementation, subject to credit growth above 15%; it’s also positive for the INR as GSEC bond yields may raise as
Govt will issue/supply more papers (recap bonds) in the market eventually.
These recap bonds will act as a capital buffer for the PSBS to
support their B/S, higher provisioning norms by RBI from April’18 under new
accounting rule (from present 55% average to 75%) and expected surge in corporate/MSME
lending.
As economy is expected to improve with moderation in NPA, PSBS
may repair their fragile B/S of their own by raising adequate capital and by
less provisioning requirement and thus Govt may convert those recap bonds into
normal GSECS & sell them in the market subsequently without increasing
their holding in the state run banks (like in 1990).
Thus all will depend upon recovery or effective resolution of
huge banking NPA and subsequent credit growth to help corporate/MSME private
investments. But lack of quality & eligible borrowers, still very high
lending rate being charged by the banks, Govt’s war on “black money” may be
some of the structural issues behind muted credit growth & private
investments so far; the economy is now virtually running on Govt’s capex &
consumption.
India’s legacy issues of high real rate of interest (RRI-6-8%,
if we consider average CPI at 5% & effective bank lending rate of 11-13%
for corporates/MSME) may be too high for a project to be viable, if financed by
the Indian banks; the same for developed/EM may be around 2-4%. These decades
old high RRI may be the primary reasons behind today’s huge NPA apart from some
cases of fraud & willful defaulting.
Thus, India also needs to lower its repo/lending rate to
globally competitive level of 4% at least in line of China, but that is not
possible, unless small savings rate go down correspondingly along with GSEC
yields.
But, drastic cut of small savings rate may be also a political
risk for the Govt as the country lacks basic social security system and it also
may not take any risk by drastic cut in RBI repo rate as it may cause FPIS to
exit Indian bond markets, hunting for higher yields, which may be a major
source of fiscal deficit financing.
Today, Nifty was supported by SBI, ICICI Bank, L&T, IOC,
Axis Bank, Ultratech cement, Tata Motors, RIL, ITC & Adani Ports by around
182 point, while it was dragged by HDFC Bank, HDFC, Bajaj Fin. Kotak Bank, Yes
Bank, Indusind Bank, IBULLS HSG, Sun Pharma, TCS & Asian Paints by around
110 points cumulatively.
PSBS has gained between 10-47%; but most of the private banks
and NBFC, barring ICICI & Axis were is pressure for concern of losing
market share after Govt’s big recap plan for the state run banks. Infra stocks,
specifically road builders were in good demand on Rs.6.92 road building plan by
the Govt and surged between 4-10% today.
Overall, today Indian market was helped by PSBS, PSU (buzz of
fresh ETF), selected private banks, capital goods, infra, power, auto &
techs., while dragged by pharma & metals to some extent apart from private
banks.
ICICI
& Axis bank today rallied on hopes that overall system NPL clearing thrust
by the PSBS after recaps/haircuts/NCLT/IBC may also benefit these two corporate
stressed assets ridden old private lenders. NPL resolution may get traction for
the PSBS after Govt recaps, which will enable them to take adequate haircuts
(waive off) for OTS & move on; but this may be also a big political
controversy for state run banks in a country like India as the amounts are huge
and involved with so called “crony capitalism”.
After today’s “monster rally” of over 30%, PSBS Nifty PE (TTM)
is now around 48 vs 28 of Private peers; i.e. over 70% more expensive against
private banks having an average EPS CAGR of around 25%; average historical PE
of PSBS is around 10 against negative earnings growth; even if EPS recovers
after recaps narrative, 20 may be a very reasonable PE of PSBS; i.e. it’s still
around 140% expensive after today’s historical rally.
Global Market Mixed On Higher USD & US Tax Reform Uncertainty:
Asia Surged Barring Japan On Higher USD, China Optimism & India's Bank Recaps Booster:
USD Plunged On Fed Chair & US Tax Reform Uncertainty And Muted Corporate Earnings:
SGX-NF
BNF
EURUSD
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