Nifty scaled life time high on Fed/RBI pivot optimism; next?

·         Although for Nifty, NSE shows FY24 and Q1FY25 TTM EPS around 1051 and 1075 respectively, the actual calculated value should be around 856 and 873

·         At present, Nifty is trading around 29 TTM PE (bubble zone) rather than NSE’s fair PE around 23

·         At estimated FY25 EPS around 1027 (+20% growth) and 15-20/22-25 PE; Nifty should hover around 15400 (panic/bear)-20500/22000 (fair)-25700 (bullish) zone

·         Growing political & policy paralysis in weak Modi 3.0 may affect investor confidence amid sticky inflation, elevated unemployment, and ballooning public debt (now approaching 100% of India’s nominal GDP)

India’s benchmark stock index, Nifty closed around 25052.35 Wednesday and surged +0.92% for the week (till day) on positive global cues amid hopes & hypes of an early Fed pivot and fading concern of an imminent Iran attack on Israel. The market is now expecting cumulative Fed rate cuts of -100 bps in H2CY24; i.e. a rate cut of -50 bps each in Sep-Dec’24. But Fred may not cut -50 bps pace at present and the Sep’24 rate cut is still not a done deal even after Fed Chair Powell’s Jackson Hole speech; Fed may not launch 11 QTR rate cuts from Sep’24 without evaluating Aug’24 inflation and Job data.

Like Wall Street, India’s Dalal Street now may also be expecting similar RBI rate cuts from Dec’24 (if Fed cuts from Sep’24 or Feb’25 (if Fed cuts from Dec’24). RBI may also officially shift its stance from present restrictive to neutral in Oct’24 or Dec’24 if the Fed indeed starts cutting rates from Sep’24 or Dec’24. Recent RBI/Governor Das comments indicate RBI may not cut until the Fed starts cutting and for that RBI will observe the Fed’s real action, not any forward guidance/jawboning.

If by Dec’24, India’s headline CPI remains sticky around +5%, then RBI may also change its inflation targeting stance to core inflation (at least unofficially with a word of caution). But lower RBI rates; i.e. lower bond yields differential may result in lower NIM for the lending model by banks & financials, although higher bond prices will be positive for the HTM bond portfolio of banks, especially PSU banks.

Also, in the last few years retail/HNI and even corporate bulk deposits have also flowed into the Indian financial/stock market for a ‘very attractive’ and almost ‘assured’ return, thanks to Modinomics and Fed/RBI; India’s Nifty soared over +235% in the last four years from COVID-19 low of around 7511 (Mar’20) to around 25127 (Aug’24).

Even if we consider pre-COVID Nifty levels of around 12000 and now 25000, Nifty gained over +100% in around four years; i.e. +25% on an average, which is far more than any fixed deposit or any other savings instrument in banks/financials. Thus retail/HNI/corporate deposits are now shifting from banks & financials to the financial/stock market either directly or indirectly (through MF/SIPs etc). Even if one invests in blue-chip stocks prudently in a disciplined manner, an investor may earn good after adjusting for inflation (5% average).

Thus there is a shift of bank savings deposits to the stock/financial market and the Bank’s source of low-cost funds is getting depleted, negative for NII/NIM. Thus Bank Nifty is under pressure amid a higher credit/deposit ratio; RBI has also warned banks to go slow for credit/lending expansion in line with the falling deposit base of banks. Thus Bank Nifty has been underperforming Nifty in the last few months.

Overall, in terms of percentage points for the last three months, India’s Bank Nifty was boosted by Federal Bank (+22%), ICICI Bank (+9%), HDFC Bank (+7%), Kotak Bank (+5%) and Bandhan Bank (+3%), while dragged by retail deposit heavy PCU banks like PNB (-13%), BOB (-5%), and also some private banks like IDFCFIRST (-5%), Indusind Bank (-3%), SBIN (-3%), Axis Bank (-1%) and AU Bank (-1%).

Overall, in terms of percentage points for the last three months, India’s Nifty 50 was boosted by Shriram Finance (+34%; loan against Gold NBFC-record high gold prices); INFY (+32%); HDFC Life (+28%); SBI Life (+27%); HCL Tech (+27%); LTIM (+25%); TECHM (+24%); Sun Pharma (+24%); ONGC (+19%), Bajaj Auto (+18%), TCS (+17%), DRL (+17%), Wipro (+17%), ITC (+16%), and HUL (+15%), while dragged by Tata Steel (-12%), Adani Ent (-7%), Maruti (-4%), Indusind Bank (-3%), SBIN (-3%), and Axis Bank (-1%).

For the last month, India’s Dalal Street was boosted by Pharma (domestic and US election/Trump 2.0 optimism, techs/IT (AI/NQ optimism), FMCG, Media, and private banks to some extent, while dragged by PSU Banks, realty (unfavorable tax imposition in the budget), automobiles (concern of slowdown/recession-growing inventory buildup and a slump in export due to competition from Chinese EVs), PSE/PSU (extreme bubble valuation), infra, metal and energy. Overall, in the last three years, Nifty gained almost +50%, outperformed PSE, PSBS, realty, automobiles, energy, infra, metals, pharma and FMCG, while underperforming by techs, media and private banks.

RIL was also under stress as its oil refining (Petchem) and retail business may be under pressure; although global oil refining spread may have improved in Q3CY24, organized retail mall of the FMCG sector may be under structural issues amid the rise of quick/instant FMCG service companies like Swiggy Instamart and Blinkit. There is a change in the FMCG retail business model and most people are now visiting shopping malls to buy garments and consumer durable goods and eat food at the food court rather than buying/carrying FMCG goods (daily items) as the same discount/offers available with such instant FMCG seller companies (Swiggy Instamart). But most of the organized retailers companies like Spencer, and JIO are also trying to match the instant online service by growing organically or even inorganically. RIL may also soon buy out such instant retail FMCG services like Swiggy itself.

Another issue for RIL is it may face some telecom distress in the coming days after abnormally jacked-up tariffs along with other private telecom companies (like Airtel, and Idea-Vodafone). We may see mass porting from such private telecom operators to PSU BSNL, offering much lower tariffs. Nowadays, one typical middle-class small family normally has 3-5 mobiles with even dual SIMS. This means that one such family may have to recharge 3-10 SIMS every month along with home broadband, OTTs and other entertainment/communications. Private telecom operators have increased their monthly tariffs by around INR 100 on average. This translates additional burden for a middle-class family, which is already struggling under the increasing cost of living and lack of good-paying jobs/insecurity.

RIL is also facing stress in the digital OTT business as its JIO cinema platform is far inferior to giants like Amazon Prime, Netflix and Sony. Thus RIL is now trying to grow inorganically in this OTT space by buying out (JV/merger) of Indian assets of Disney-Hotstar for $8.50B.

Overall, Nifty recovered over 1300 points from a recent low of around 23893.70 (after scaling 25030.95 soon after the budget) on hopes of political & policy stability under Modi 3.0 and a blockbuster budget. Although the July budget for FY25 (final) may not be termed a blockbuster, it was not harmful either, especially after the abolition of the Angel Tax and the introduction of the FNO tax. Over the last ten years, India’s Nifty was boosted by not only Modinomics optimism and the appeal of 6D (Demand, development, demography, digitalization, deregulation, and democracy) but also Nifty earnings (EPS) and political & policy/macro stability. Indian stock market also enjoys a scarcity premium in the EM space for political & policy/macro and earnings stability.

IBut India’s Nifty may now be a bubble zone if we calculate EPS properly

 

If we consider NSE calculation, at present Nifty levels of around 25000, the TTM (Q1FY25) Nifty EPS is around 1076 (at TTM PE around 23), while calculated Nifty TTM EPS should be around 873 (as per index weightage ratio) and in that scenario, the TTM PE of Nifty is currently above 29, extreme bubble zone. Also if we consider individual stocks (constituents) under Nifty, most of them are in the extreme bubble zone (sky-high PE ratio, much more than their present or potential earnings/EPS growths). At Q1FY25 TTM EPS is around 873 and a fair PE range of 20-25, Nifty should hover around 17500-22000 zones.

As per our calculation, FY24 Nifty EPS was around 856 against NSE figure 1051; assuming an average EPS growth of around +20% (in line with a current average of +18% for the last five years), the estimated FY25 EPS may be around 1027 and a fair PE of 20 (against average EPS growth of 18%), the fair value of Nifty should be around 20544 for FY25 (projected EPS 1027); 24653 for FY26 (projected EPS 1233), and 29583 for FY27 (projected EPS 1479).

Conclusions:

As the financial market usually discounts one year of EPS in advance, the current fair (neutral) value of Nifty should be around 20550 at a median PE of 20, while the bullish zone may be around 25700 and the panic (bear) zone may be around 15400. At present, Nifty should hover around the 20500/22000-25700 zone (assuming the estimated Nifty EPS for FY25 is around 1027 and fair/bullish PE 20/22-25).

 

Looking ahead, Nifty may be under pressure for not only adverse global cues, but also bubble valuation, and growing political & policy uncertainty/paralysis as Modi 3.0 is visibly weak (rollback government) and too busy with politics (against strong united opposition) rather than core economics. Modi 3.0 is now pre-occupied with Operation Lotus strategy to stay in power and win in the forthcoming crucial five state elections with the leadership of PM Modi to consolidate his power within the party (BJP/RSS); otherwise, Modi may have to exit early Dec’25 with a suitable successor in place (Gadkari, Singh and Shah).

Technical trading levels: Nifty Future

Whatever may be the narrative, technically Nifty Future/ India 50 CFD (25000) now has to sustain over 25200 for any further rally to 25400/25500*-25700*/26000 in the coming days; otherwise sustaining below 25150/25000-24900/24800 may again fall to around 24650/24500-24400/24300* and 24000/23700-23300*/23000 and further to 22800/22600*-22300/21800/21300* and further to 21150/21000*-20400/20000* in the coming days.