Nifty stumbled from 20K on softer than-expected report card (earnings & guidance)

Nifty EPS grew by only +6% in FY23 and is projected to grow +8% (6-10%) in the coming years on an average

India’s benchmark stock index Nifty scaled a new lifetime high of 19990.80; i.e. almost 20000 Thursday (20^th July). Overall Nifty soared almost +12% since Mar’23 and was primarily supported by an FII boost amid improving domestic macros, solid corporates earnings, the appeal of Modinomics, and India’s 6D (demand, demography, democracy, deregulation, development, and digitalization), coupled with political & policy stability and hopes of Fed/RBI pivot.

The Indian capital market is also enjoying a valuation/scarcity premium among comparable emerging market economies (EMEs), and FPIs are now scrambling for India, considering the currency/macro/policy/political stability along with well-managed blue chip companies, improved corporate governance, strong banks & financials, and deleveraged corporates. India is now enjoying the benefit of a vibrant economy and democracy, a rare combination in the EM world.

In the last 30 days, the Indian market was boosted by banks & financials, media, pharma, automobiles, realty, energy, infra, FMCG metals, and techs. Individually, RIL and HDFC duo helped with demerger and merger optimism respectively. On Friday (21^st July), Nifty was dragged by Infy (subdued report card/guidance), RIL (concern of subdued report card and demerger valuation issues), TCS, HDFC Bank, HUL, HCLTECH, M&M, Wipro, and Axis Bank, while boosted by L&T (bullet train contract/order boost), Kotak Bank (hopes of upbeat earnings), SBI, ONGC, NTPC and ICICI Bank to some extent. Overall, Dalal Street was boosted by media (Sun TV, PVR INOX, Navneet Publication, and Dish TV), PSU Banks, and automobiles, while dragged by techs/IT (subdued guidance from Infy and selling in Nasdaq), FMCG, Metals, energy, private banks, pharma, infra, and realty to some extent.

For YTD, the Indian market was boosted by interest rate sensitive realty, automobiles (hopes of RBI pivot), FMCG, infra, Pharma, banks & financials, metals & media, while dragged by metals (Chinese subdued growth), media and energy. Overall, Nifty was boosted by RIL, HDFC duo (merger optimism), and ITC while dragged by Adani's group of stocks. But Adani group was also able to recover from Hindenburg’s panic low after stake buying by angel investors led by GCQ.

Nifty EPS grew by only +6% in FY23 and is projected to grow 6-10% in the coming years on average:

At around 858 TTM EPS (FY23), the current Nifty PE is around 24.00 against the average fair PE of 20. So far, the Nifty EPS trend in Q4FY23 is subdued at around 858 against Q3FY23 levels of 850. The FY22 Nifty EPS was around 809, while the market is expecting around 875 in FY23 (Q4FY23), i.e., an annual growth of around +8%. For FY23, at around 858 EPS and an average PE of 20, the fair value of Nifty should be around 17160 (fair valuation for Mar 22). The FY: 24-25 projected fair value may be around 18550-20050.

At the present trend rate, the projected FY24 Nifty EPS may be around 927 assuming +8% annual growth, and at an average PE of 20, the projected fair value may be around 18536. Further, if we assume +8% annualized growth in Nifty EPS in FY: 25-26 (depending on actual Fed/RBI rate action, Russia-Ukraine war, and inflation trajectory), projected Nifty EPS may be around 1001 and 1087, which translates to a fair value of Nifty around 20019 and 21621. As the financial market usually discounts 1Y EPS in advance, Nifty may scale 20050 by Dec’23, 20775 by Mar’24, while FY23's fair value may be around 18500-17100.

The Q4FY23 Nifty EPS was around 858 against 850 sequentially (+0.94%) and 809 yearly (+6.06%); at this and the previous average QTR/YLY run rate, Nifty consolidated EPS may grow around 1.5-2.5% sequentially or 6-10% yearly for FY: 24-26. The subdued Nifty earnings are due to lingering global macro-headwinds, geo-political tensions, and resultant sticky elevated inflation, both locally and globally, and higher borrowing costs are affecting discretionary consumer/corporate spending, affecting earnings.

If inflation indeed comes down and RBI/Fed goes for pause/pivot, i.e., rate cuts in early FY24 (ahead of the general election), Nifty EPS may grow around at least +10% CAGR rate on an average considering huge fiscal/infra stimulus, growing affluent middle class, and higher USDINR (growing policy/macro divergence between RBI and Fed)-positive for export savvy Nifty blue chips (almost 60% of Nifty earnings comes from export). Subdued external trade amid the chorus of synchronized global stagflation/recession may affect Nifty EPS despite upbeat domestic macros. Overall, if India’s real GDP grows around +6% and core inflation/inflation also grows around +6%, then Nifty earnings may also grow around 6-10% in the coming days.

India is now enjoying scarcity premium not only among EMs but also DMs due to political & policy stability (Modinomics), the mantra of reform & perform, and the appeal of 6D (development, demand, demography, democracy, deregulation, and digitalization). India has strong banks & financial system due to a strong capital buffer and regulatory system. India’s low external debt and manageable trade deficit are a huge advantage compared to many EM peers.

India’s inflation/core inflation may be bottoming out and may again surge in the coming months:

On 12^th July, the MOSPI data shows India’s headline/total CPI annually (y/y) surged to +4.81% in June, from +4.31% in May, higher than the market consensus of +4.60% and accelerated for the 1^st time in 5-months amid higher food and fuel cost coupled with elevated housing, clothing & accessories and misc. items.

On a sequential basis (m/m), India’s total CPI jumped +1.01% in June from +0.56% in May and the largest monthly gain since Apr’22.

India’s core CPI also edged up +5.10% in June (y/y) from +5.02% in May. Overall, the 3M rolling average of underlying headline CPI may be now running around +6.00%, while core CPI is now running around +5.50%, both still substantially above RBI’s target of +4.00%. Also, an overall trend may be indicating inflation may be bottoming out and we may see structurally higher inflation/core inflation in the coming days amid higher/elevated logistic costs, lower crop production amid unfavorable/extreme weather, and higher food inflation, elevated / sticky total/core service inflation and also goods inflation. Also, oil may be finding a base around $70 amid OPEC jawboning/voluntary production cuts and increasing Chinese demand.

On 31^st May, MOSPI flash data shows India’s real GDP (at constant prices) was around Rs.43.62T in Q4FY23 vs 40.23T sequentially (+8.43%) and 41.12T yearly (+6.08%). The Indian economy grew around +6.1% in Q4FY23 (y/y) against +4.5% sequentially and above the market forecast of +5.0%. For FY23, India’s real GDP was around Rs.160.07T against 149.26 in FY22 (+7.25%) and 136.88T in FY21 (+9.04%); i.e. the Indian economy grew by around +7.2% in FY23 against +9.1% in FY22.

At the present run rate, the Indian real GDP may grow by around +6.0% in FY24 to reach Rs.169.67T (~170T). As per the trend, the Q1FY24 real GDP may contract by around -10% in Q1FY24 sequentially to Rs.39.26T against Q1FY23 Rs.37.44T; i.e. an annual growth of around +4.86%.

On the expenditure side, in Q4FY23, the expansion was mainly boosted by private consumption (consumer spending), services exports, and manufacturing amid easing input cost pressures. Also, services have emerged as a major driver, comprising more than half of GDP. Private spending rose at a faster 2.8% (vs 2.2% in Q4 2022), public expenditure rebounded (2.3% vs -0.6%), GFCF (Gross Fixed Capital Formation) rose faster (8.9% vs 8%), stocks recovered (5.9% vs -0.1%), and exports (11.9% vs 11.1%) increased way more than imports (4.9% vs 10.7%). Overall, Government spending, especially in transport and social infra along with upbeat service/IT export boosted Indian GDP in FY23.

But going ahead, India also has to bring proper political reform, especially on the political funding aspect, proper policy for population control, and more targeted infra stimulus (transport-specially railways and social infra-especially quality medicare and education). Thus the scope for future improvement in GDP and GDP/Capita is immense. This, along with a deluge of quality companies, good business models, growing deleveraging, and impeccable/credible management, the Indian stock market may outperform not only its peers (EMs) but also many DMs. The Indian economy has to grow +8% in real terms (if not +10% potential) over the next 10/15 years, keeping core inflation stable around 4/5% so that Nifty EPS/Corporate earnings should also grow 15-20% CAGR on an average.

On the production (GVA) side, the manufacturing sector grew for the first time in three quarters (4.5% vs -1.4%) and faster increases were recorded for the farm sector (5.5% vs 4.7%), construction (10.4% vs 8.3%), financial and real estate (7.1% vs 5.7%), and public administration (3.1% vs 2%).

The next move of Nifty will depend upon RBI/Fed rate action:

Overall, RBI is quite optimistic about India’s GDP growth but is still concerned about elevated sticky core inflation. RBI is also quite optimistic about maintaining India’s price, financial, and growth stability through its calibrated policy action. As India’s core CPI is still substantially higher than targets, while real GDP growth is almost in line with the potential trend, RBI is still open for another one +25 bps rate hike. If Fed indeed goes for another two rate hikes in H2CY23 for a repo rate of +5.75%, RBI may go for at least another +25 bps rate hike by Dec’23 for a corresponding repo rate of +6.75%. But, if Fed goes for only another rate hike in H2CY23 for a terminal repo rate of +5.50%, RBI may continue to hold at +6.50% in FY24.

Fed is now clearly preparing the market for another one/two hikes and then a possible end of the tightening cycle by Dec’23. Overall, the U.S. labor market and core inflation trajectory are still hot enough for another two Fed hikes. Fed never surprised the market with its rate action, and as the overall labor market and core inflation is cooling gradually, while the Fed repo rate at +5.25% is now near the mid-zone (+5.50%) of the restrictive zone (5.00-6.00%), Fed goes for a pause on 14^th June, but also projected (June SEP) for another two hikes in H2CY23 to manage inflation expectations.

Looking ahead, Fed may try to balance the financial/Wall Street stability and price stability by expressing intentions to move for any rate action in July and November. Also, Fed has to ensure lower borrowing costs for the U.S. Government (Treasury) endless deficit spending and mammoth public debt of almost $32T. The U.S. has paid around 9.5% of its revenue as interest on public debt against China/EU’s 5.5%. This is a red flag, and thus Fed has to operate in a balancing way while going for calibrated hiking to bring inflation down to target, ensuring a soft and safe landing.

Thus Fed may go for a dovish hike on 26^th July; Fed may go for a long pause, at least till 1^st November’23, to assess the underlying core inflation trend and outlook along with the labor market for July-Oct’23 economic data. Fed may project at least another hike in 2023 in its September dot-plots (SEP) depending upon the actual economic data and outlook. If there is no significant easing of core inflation, especially core service inflation, then Fed may go for another +25 bps hike in Nov’23 and possibly the end of a tightening cycle.

Further, if core inflation indeed eased further to around +4.0% by Oct’23, then Fed may refrain from any further rate hike in 2023 and may also indicate some rate cuts in Q2CY24 (ahead of the US Presidential Election in Nov’24) to keep real repo rate around +1.00% levels.  As a strategy, Fed speakers are now talking more hawkish than expected and any less hawkish hike on 26^th July may cause a short covering rally on/before 26^th July.

For July, apart from Fed rate action, Nifty may also be influenced by the Q1 earnings report and inflation data. India’s core inflation may jump and stay elevated and sticky due to underlying structural issues like higher logistic costs and adverse weather conditions, which pushed food inflation substantially higher in the last few weeks. If Fed goes for a pause in H1CY24 and some cuts in H2CY24, then RBI may also follow and may go for a -50 bps cut in Apr’24, just ahead of the May’24 general election. RBI may like to ensure at least +50 bps real interest concerning core CPI; if core CPI indeed stabilizes around +5.00% in early 2024, then RBI may keep the repo rate at 5.50% in FY24 and go for another -50 bps cut in H2FY24.

Market Wrap: Monday (24^th July)

On Monday, Nifty slips another -0.40% to close around 19666.45 amid negative global cues and a mixed/subdued report card also on the domestic front led by RIL (weak petchem earnings), Kotak Bank (subdued guidance) after Infy on the weekend. Also, ITC dragged on the confirmation of hotel division demerger news.

Technical Analysis: Nifty Future (LTP: 19681)-EOD: 24/07/23

Looking ahead, whatever may be the narrative, technically, Nifty Future now has to sustain over 20100 for a further rally to 20375*/20650-21050/21550 in the coming days (Bullish case scenario). On the flip side, sustaining below 20000-20050 Nifty future may again fall to 19645*/19475-19300/19250-19090/18995*-18880/18595* and further 18350/18150*-17775/17650 in the coming days (Bearish case scenario).

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