Nifty slid on fading hopes of a clear Modi 3.0 after election

·         India may be heading for a hung Parliament, but any sharp correction may be a wonderful opportunity to enter blue-chips amid a supportive valuation

India’s benchmark stock index Nifty closed around 22306.95 Wednesday (8th May), slipped almost --1.32 % in May (till date)on fading hopes of a clear Modi 3.0 after three phases of election/polling across India (total of seven phases), in which fate of 295 LS seats has been locked in the EVM machine. As per unofficial estimates by various media persons, political analysts and psychologists, the ruling incumbent Party BJP/Modi may have already lost around 45 seats than it got in the last election in 2019. Most of these 295 seats were won by BJP in the last 2019 election. These seats are seen as BJP strongholds, especially for phase three election/polling held on 7th May.

Overall, after 10 years of political stability, this time India may be heading towards a hung Parliament this time instead of another blockbuster Modi win with around 400 seats or even 350 seats. After three rounds of poling in various states on 19th April, 26th April, and 7th May, many experienced political analysts are now predicting at least 45-55 seats loss for the ruling BJP this time amid 5-10% lower polling in strong BJP areas. There is no meaningful Modi wave this time due to 10 years of anti-incumbent waves amid growing unemployment/under-employment, especially for educated youths and incrementally higher cost of living (inflation).

Also, the lack of any nationalistic issue like the Pulwama-Balakot surgical strike on POK just ahead of the 2019 general election is now going against BJP/Modi. The election battle has now turned into Mandal/Mandir/Masjid/Mangalsutra; Democracy/electoral-quasi-autocracy; fastest economic growth/jobless economic growth; Fragile Five/First Five etc. There are issues of secularism, democracy/electoral autocracy/constitution, inclusive growth/redistribution of national wealth, caste census/universal social security and even inheritance tax controversy.

If BJP indeed loses around 50 seats by the 3rd phase of polling than last time in 2019, then it may be ‘game over’ for BJP/Modi this time as it will be almost impossible to make up these 50 seats in the rest of the four phases of polling, in which BJP’s strike rate was much lower even in 2019. Thus by 10th May (after getting clear polling trends % and on-ground surveys by various digital media channels & experts), we have an idea about whether the country is heading for a hung Parliament or not this time.

In any way, this time big swing states are Bihar, Karnataka (KA), MH, MP, RJ, UP, WB, and even Delhi (with only 7-seats-Khejriwal arrest sympathy wave), where BJP may lose 50 or more seats than in 2019, while it’s almost impossible for BJP/Modi to win significantly more seats (than in 2019) in other big states like AP, Assam, (CAA/NRC issues), Chhattisgarh (CM Soren arrest sympathy wave), GJ (Rajput caste issues), Haryana/Punjab (Kisan to Palawan/Farmers to Wrestlers issues), Odisha (no pre-poll alliance with BJD), TN (no alliance with AIDMK), Telangana, and J&K.

In known BJP stronghold states like Bihar (after an alliance with Nitish Kumar), KA, MH, MP, RJ and even in UP, BJP may lose many seats this time due to various internal conflicts over rapid ‘Congressionalization’ of BJP and BJP ‘Washing Machine/ Modi detergent powder’ issues; i.e. bringing of alleged corrupted opposition political leaders into BJP and giving them election tickets depriving old/original BJP leaders/workers, sympathy wave in favor original Shiv Sena (Uddhav Thackeray) after unethical removal of the later from MH CM post and break up of Shiv Sena using money/muscle/PMLA power.

Also, BJP’s parenteral organization RSS (Nagpur lobby) may have now abandoned Modi and favoring Gadkari or even UP CM Yogi, Rajnath Singh as the next PM of BJP/NDA due to various internal issues with Modi-Shah (Gujrat lobby). In WB, BJP may lose 8-10 seats this time despite Mamta Didi’s corruption, governance, and various other anti-incumbency issues as BJP’s Hindutva/caste/North India model is no longer working now in WB, which is relatively more mature politically and also intellectually. The same is almost true for South India.

In brief, the BJP will lose in Muslim-dominated areas in South, East, and even in West and North India. Although BJP/Modi may get a higher vote share than in 2019 in South India this time, it may not result in more seats. Overall, most of the ordinary voters across India are more worried about growing unemployment/underemployment, rising inflation/cost of living expense, and corruption rather than Mandir, Masjid, Mangalsutra, mutton/mash (fish), Mandal (caste reservation) and even Ambani-Adani’s alleged political donation with black money.

But it seems that no political party (even BJP or INC) has any definitive plan for job creation and how to fund the huge requirement of fiscal stimulus required to turn India into a developed economy by 2047 (100 years of Independence) or even by 2100. India’s public debt + liabilities (PDL) was around Rs.17.24T in FY2004 (33.95% of real GDP), increased to Rs.55.87T in FY14 under UPA (57% or real GDP) and then surged to around Rs.168.73T by FY24 under NDA (97.59% of real GDP). India’s public debt/PDL is set to scale around Rs.184T by FY25, almost at 100% of the estimated real GDP of FY25. India is expected to pay around Rs.12T as interest on public debt and is set to borrow around Rs.17T in FY25; i.e. almost 70% of incremental borrowing is just to pay interest on previous debt.

Thus the Indian Federal government has now limited space to borrow/print LCU (INR) in a big way to fund fiscal stimulus/government deficit spending as it will result in LCU devaluation both domestically and also globally (higher USDINR due to higher inflation). Therefore, the government should plan alternative ways to increase revenue like modification in personal tax codes so that every employed person should pay some type of minimum tax (MAT) and in lieu, the government should provide universal quality healthcare, education, and also unemployment benefits for all eligible persons. The government should also explore part/full disinvestments of PSUs (except strategic ones to ensure national security) to fund the growing need for traditional and social infra (railways, hospitals, and schools/colleges). The government should meet the fundamental right of quality free healthcare and education like all other developed countries.

India has grown from a fragile state to a developing state under Cong/INC PM Narasimha Rao/FM Manmohan Singh (1991-96), had incremental growths even under Vajpayee BJP government (1996-2004), to upbeat growths under INC/UPA (2004-2014) and NDA (2014-2024). But the country now needs monumental inclusive growth along with price stability and maximum employment to become a developed economy by 2050-2100. India needs better & expanded transport and social infra to meet incrementally higher demand from a huge/growing population.

The government needs to create/supply much more infra to meet growing/elevated demand with a feasible plan to control the population, which needs political will as India’s huge unemployed/under-employed population is a good vote bank for political parties, especially ruling party (Federal/State governments) –dole money politics at the expense of Federal/state exchequer (fiscal stimulus/grants/subsidies etc). In the last ten years, the Indian Federal government (NDA-FY: 2014-24) has spent over Rs.36T as dole money (various social security schemes including direct cash transfer and subsidies on food for the poor section of the society over 1B people, over 70% of India’s total population around 1.40B. As per RBI/Budget data, the Indian Federal Government has spent various social service schemes around Rs.8.84T during FY: 2004-14 under UPA and Rs.17.05T during FY: 2014-24 under NDA admin.

Thus, whoever may form the next government (NDA/INDIA), policymakers need to go for the box idea to make India a developed economy by 2050; for this India needs to invest much more in traditional infra/railways, and also social infra (government schools/colleges/hospitals) to meet growing demand for the huge population. The government may need to go back to the disinvestment policy boldly and gradually sell stakes in PSUs (except strategic ones) without compromising national security issues over the next 10 years.

The market capitalization of PSUs was around Rs.50T in Jan’24 and the government may target at least 10% stake sale each year to fund the huge infra requirement without taking additional loans. India’s public debt will soon surpass real GDP and the government is already paying around 45% of core tax revenue for interest alone. Thus there is no meaningful space for additional loans and the government has to find an alternative way to fund this without additional loan/money printing and taking external FX loans.

Also, additional government loan/money printing may result in higher inflation and devaluation of INR. If Gadkari indeed happens to be India’s next PM, we may see a thrust on disinvestment and PPP (projects) as we have seen with his Road ministry. Gadkari has a liberal/moderate image and thus may be able to secure political consensus for disinvestments and other monumental reform agendas (economic policies) going forward.

Now from politics to economics, on 12th April, the MOSPI data shows India’s annual CPI (inflation) eased to +4.85% in March from +5.09% sequentially, almost in line with market expectations of +4.91% and the lowest since May’23. Although it may be a pure coincidence, ahead of the election, India’s sequential (m/m) CPI remains around 0%.  In March, India’s total CPI was dragged by lower food inflation led by relatively lower prices for vegetables, pulses, spices fruits and oils, and fats. Meanwhile, a slowdown was also seen in prices for clothing and footwear, miscellaneous and housing.

Overall, India’s average CPI for 2023 was around +5.66%, while the 6M rolling average was around +5.19% in March. India’s core CPI

India’s core inflation also eased to +3.25% in March from +3.37% sequentially, while the 6M rolling average is now around +3.75%.

Overall, RBI is now not in a position to cut rates as headline CPI is still substantially above the target of +4.0% and the Fed may not cut rates before Sep’24 or even before Mar’25. RBI has to follow Fed whatever may be the domestic inflation narrative.

Nifty EPS may grow by around +20% in FY24 and by +15% on an average in FY: 25-30

India’s real GDP has grown around +9.04% in FY22, +7.24% in FY23, and is projected +7.3% in FY24. Indian real GDP is projected to grow by around 8.00-10.00% on an average in FY: 25-30, and Nifty EPS should also grow by around 15-20% CAGR (from the present trend rate of 10%). Nifty earnings growth may be boosted by possible RBI/Fed rate cuts (lower borrowing costs), another stable government led by PM Modi/BJP (policy stability), huge thrust on infra spending, possible GST/income tax rate cuts, lower oil prices, adequate pricing power by producers, increasing government spending and also private capex coupled with higher USDINR, positive for export heavy Nifty earnings.

At the present run rate, Nifty EPS may grow by around +20% in FY24 to INR 1030 against FY23 EPS of around 858 amid higher USDINR (positive for export-heavy Nifty earnings), robust performance by banks & financials (higher bond yield positive for higher NIM/NII), and vibrant domestic demand. The current TTM EPS of Nifty for Sep’23 QTR is around 938 and at 20 averages PE, the fair value of Nifty may be around 18760; Nifty made a recent low around 18837 in late October after the Israel-Hamas Gaza war broke out.

Now looking ahead Nifty may report a TTM EPS (FY24) of around 1030 in Q4FY24, assuming an average sequential growth rate of around +5%, in line with the present trend. Thus at 20 average PE, the fair value of Nifty may be around 19700 and 20700 by Mar’24; further, assuming an average growth/CAGR of around +15% (against projected real GDP growth of around 8-10%), Nifty EPS may be around 1184-1362; and Nifty fair value may be around 23700-27250 by FY: 25-26.

As the financial market usually discounts EPS (earnings) at least one year ahead, Nifty may scale 23700/24000-27250/27500 by Dec’24/Mar’25 and Dec’25/Mar’26. But this journey may not be in a straight way and will happen in a zig-zag way in line with the underlying news/event.

India’s current growth story is too much ‘Modi’ dependent (one man story), and there is a perpetual risk after his absence. But BJP is also a cadre-based professional political party along with various credible faces (like Gadkari) for the next leader (after Modi). Even under a Cong-led (IND) government, the Indian growth story may remain unaffected as records show no major differences between UPA (2004-14) and NDA (2014-24). Thus any sharp correction after the election (in the scenario of a hung Parliament) may be a wonderful opportunity to buy the Indian growth story at a deep discount as valuation is supported by solid earnings growth irrespective of any political narrative.

Market impact:

Overall Nifty surged almost +1.38% in April; Nifty was boosted by HDFC Bank, ICICI Bank, Axis Bank, SBIN (upbeat report card by banks), Bharti Airtel (satellite spectrum after donation to BJP through EB), NTPC, Hindalco, M&M, Tata Steel, ITC and Eicher Motors, while dragged by INFY (subdued guidance), Kotak Bank (RBI regulatory action as face-saving action after Kotak donated BJP to get favorable candidate for CEO post), HCL Tech (subdued report card) L&T, RIL (subdued report card), Bajaj Finance, Sun Pharma and Titan. The Indian market was boosted by metals (hopes & hypes of Chinese recovery), banks & financials (upbeat report card), realty, media, energy, automobiles, infra, FMCG, while dragged by techs/IT (subdued guidance and flat USDINR).

India’s Dalal Street was also dragged by escalating geopolitical tension of another small WW after a friendly war drill between Israel-Iran and growing uncertainty about India’s general election outcome. Overall, India may be heading towards a hung Parliament this time instead of another blockbuster Modi win, which was unthinkable even two months ago. But various political and also electoral bond scam issues changed the narrative and the Indian stock market is not discounted at all for any hung Parliament-like situation in the coming days, which may cause political and policy chaos to some extent. In that scenario, Nifty may correct 20-30% and USDINR may surge 10-15% before any political & policy stability.

Technical trading levels: Nifty Future

Whatever the narrative, technically Nifty/India 50 Future (22360) now has to sustain over 22250 for any recovery to 22700/22900-23050/23375 and 23700/24000 levels in the coming days/weeks (if Modi indeed comes to power again with a comfortable majority); otherwise sustaining below 22200, Nifty Future may again fall to 22000/21800-21700*/21600 and 21325*/21250-21130/20850, and further 20700-20630/20460-20280/19730 and even 19400 levels in the coming days (under hung Parliament like scenario).