Nifty Surged Most Since Nov’22 on Positive Global Cues and RIL Boost

Dalal Street was also boosted by FY/QTR ending portfolio rebalancing (short covering)

India’s benchmark stock index closed around 12359.75 Friday, jumping almost +1.63%, the most since Nov’22 on positive global cues (easing of bank crisis tension, Alibaba/Tech boost, and less hawkish Fed talks) and RIL demerger (Jio financial services) boost. Strong manufacturing PMI data from China also buoyed sentiment- boosting metal and commodity-related stocks in Dalal Street. Wall Street Futures surged overnight on Alibaba/Tech boost and the easing of the U.S. regional bank crisis.

Techs were upbeat after Chinese tech giant Alibaba (NYSE:) unveiled a major demerger plan to divide the company into six verticals (e-commerce, digital media & entertainment, cloud, AI, local service, and logistics) and list them separately to unlock shareholder value and also to satisfy Chinese regulators/authorities’ concern of the too big influential organization. The big restructuring of Alibaba may pave the way for soft relations between Chinese authorities and the private sector, especially so-called big techs, and maybe a template in U.S. and Europe too. Thus Indian techs led by Infy and TCS (NS:) also jumped.

On Friday, Nifty was boosted by RIL (demerger of Jio financial services and higher oil), ICICI Bank (NS:), HDFC Bank (NS:), Axis Bank (NS:), HDFC, SBIN (easing of bank crisis tension in the U.S.), INFY, and TCS. Overall, the Indian market was helped by banks & financials, techs/ITs, FMCG, energy, automobiles, infra, metals (higher prices of steel due to upbeat Chinese MFG PMI), media, realty, and pharma stocks to some extent. On Friday, Dalal Street was also boosted by short covering (portfolio rebalancing) on the last trading day of FY23.

For the truncated last week of March (FY23), Nifty surged almost +2.45%, while inched up +0.32% for the full month (March 23) and almost flat (-0.60%) for the FY23 almost flat in FY23 amid subdued global cues, macro headwinds, and tepid earnings growths.

At around 862 TTM EPS (consolidated) for Q3FY23, the Nifty PE is now around 20, at reasonable levels. The Nifty consolidated EPS is growing by around +2.25% on an average sequentially; i.e. annualized +9.00% against average core inflation of around +6% and nominal GDP (at current prices) GDP growths around +10%.

Nifty earnings were affected locally by higher borrowing costs, higher inflation/cost of living, elevated unemployment/under-employment, the continuing fight against all types of black money/corruptions, and resultant tepid discretionary consumer demand coupled with subdued external trade (amid global macro headwinds and Russia-Ukraine/NATO geopolitical tensions and lingering economic sanctions). Also, China’s ZERO COVID policy for most of the year has affected metal and other commodity prices and earnings of related Indian producers.

At the current sequential average run rate, the FY23 consolidated EPS should come to around 890; i.e. a growth of around +9.98% from FY22 EPS of around 809. The Q3FY23 projected Nifty EPS was around 862 vs 832 sequentially (+3.61%) and 778 yearly (+9.25%). In 9MFY23, Nifty earnings were boosted by banks & financials (higher bond yield/interest rate positive for bank’s NIM), IT/techs (higher positive for service export despite synchronized economic slowdown on both sides of Atlantic) while dragged by commodity producers, consumer goods & services and other interest rate sensitive sectors. At projected FY23 EPS of around 890 and an average PE of 20, the fair value of Nifty maybe around 17800, while at estimated Q3FY23 EPS of around 862 and PE of 20, the present fair value of Nifty maybe around 17240.

Looking ahead, Nifty EPS may grow by around +10% in FY24, to 979 in line with nominal GDP growth. And assuming an average PE of 20, Nifty may scale around 19000-19580 by Mar’24. core inflation may remain elevated and sticky around +6%. Although RBI may pause after 1-2 more hikes in May-June’23, there will be no rate cuts at least till Dec’23 (in line with Fed). So, there will be an impact of higher borrowing costs also in FY24 on the overall economy, leading to lower demand and lower corporate profits. Although, in India, corporates have adequate pricing power, there is also a limitation as consumer demand is tepid.

As of now, there are no signs of significant cooling of synchronized global inflation and also any resolution of the Russia-Ukraine/NATO war. Although Chinese reopening is positive for the overall global economy, subdued consumer demand from Europe/U.S. and also other parts of the world may limit the growth engine of the world’s 2nd largest economy.

As of now, there are no signs of significant cooling of synchronized global inflation and also any resolution of the Russia-Ukraine/NATO war. Although Chinese reopening is positive for the overall global economy, subdued consumer demand from Europe/U.S. and also other parts of the world may limit the growth engine of the world’s 2nd largest economy.

As the immediate concern of financial stability eases, both Fed and ECB may go for their planned rate hikes in a calibrated manner to ensure price and financial stability as well as credibility. Fed may go for calibrated +25 bps rate hike on 3rd May, and may also be 14th June for a terminal rate of 5.25-5.50% and then pause. Both Fed and ECB will ensure financial stability with liquidity tools and price stability with interest tools as unlike during 2008-10, core inflation is still substantially higher than the +2% targets. In a way, now May hike of +25 bps is almost certain for both Fed and ECB, while there is a question mark for June.

India’s RBI may also hike +0.25% on 6th April and further +0.25% in June (if Fed goes for a June hike after May) for a terminal rate of 7.00% against the Fed’s expected 5.50%. India’s core CPI continues to be sticky around +6.00% and thus RBI wants to ensure a real positive rate, by around +100 bps (restrictive levels) wrt at least average core inflation. Thus RBI will continue to tighten to keep interest rate/bond yield differential and also USDINR under control, which will also control imported inflation and manage overall price stability. RBI has to tighten in a calibrated way to bring inflation down by curtailing demand; i.e. slowing down the economy to some extent without causing an all-out recession for a safe and soft landing.

In a recent speech, RBI Governor Das blamed higher inflation on geopolitical tensions and economic sanctions, which need to be properly resolved for stability in global macros. As a Central Bank, RBI’s job is to hike rates well into the restrictive zone to curtail demand, so that it can match with currently constrained supply, resulting in lower inflation. RBI as well as Fed has done their jobs almost fully and may hike once/twice more in May/June and a long pause thereof at least till Dec’23 before any plan to cut (if core inflation indeed goes down towards target zones).

Das also pointed out Indian banking system/sector is now quite resilient after years of consolidation, various regulatory reforms, and also elevated NIM/NII regime; banks are now flush with excess capital buffer to avoid any U.S. types of small bank failure even in extreme stress conditions, be it for NPA or HTM/MTM bond portfolio loss.

Looking ahead, whatever may be the narrative, technically Nifty Future now has to sustain over 17400 for a further rally to 17500/575-680/820-860/975 and 18100/200-375 in the coming days; otherwise sustaining below 17350, Nifty Future may again fall towards 17250/145-17000/16950* and 16850/650*-15795/525* and further 15000/14450-13500/12950 in the worst case scenario (another 2008 type GFC; but that’s highly unlikely now as global central banks/government will now not allow that to happen in the first place).