Chanting NaMo, Dalal Street to march into uncharted territory

The Bharatiya Janata Party's victory in the heartland is the perfect icing on the cake. 'NaMo' invincible magic is unabated. Markets could not have asked for more. Read this on the backdrop of better-than-expected third-quarter earnings update by corporate India, where Nifty companies registered a net profit growth of around 10.3% year on year while our coverage universe which comprises around 230 stocks delivered 22% net profit growth. Benefits of demonetization were evident in the third quarter GDP numbers which was higher than expectations at 7% primarily due to increase in tax collection. Benefits of Seventh Pay Commission, good monsoon and policy rollouts will play throttle now, evidence of which was reflected in Rabi crop sowing being 6% higher this season. Not to forget GST rollout is likely to be by July 2017. Remonetization is in full swing and my own sense is corporate Indian will again deliver better-than-expected fourth quarter earnings update.

Liquidity has been good and domestic institutions and high networth individuals have been consistently buying quality stocks. Domestic mutual fund flows remained strong with the seventh consecutive month of inflow ($305 million in February). FII flows too witnessed the first month of inflow ($1.6 billion) after four consecutive months of outflows. FIIs which were sitting on sidelines now look to be back with much bigger appetite, signs of which were visible in February. The uncertainties, whether political or economic, are put to rest. It's an environment where the real bull market takes shape. Policy frameworks are in place, public sector banks are back in profits, metal and power companies having started generating cash flows, capital goods are showing good traction all indicative of an improvement in the macroeconomic situation at ground level.

Markets are trading around their 10-year average multiple of 18x Price to Earnings estimates for Sensex, which leaves ample scope for re-rating. We believe Sensex EPS will deliver a CAGR of over 20% for next two years. I believe that market synergies and harmony are working toward Nifty scaling new highs this financial year.

On the macroeconomic front, volatile IIP opened 2017 on a positive note; Impact of demonetization seems to have faded. The Index of Industrial Production (IIP) grew 2.7% yoy in January 2017, as against a decline of 0.1% (revised up from a decline of 0.4%) in December. It implies that IIP grew 0.6% in the first 10 months of fiscal 2017, marking the second-lowest growth in the corresponding period in the past 25 years (barring fiscal 2014). The manufacturing sector grew 2.3% yoy; mining and electricity production grew decently. The volatile capital goods moved back into positive territory, growing by 10.7%. A look at the performance of labour-intensive industries shows that things were mixed, which implies that the adverse impact of demonetization faded (with respect to December 2016). We continue to expect IIP to grow in the remaining two months of this fiscal and post a full-year growth of estimated 1% this fiscal.

Markets are likely to trade firm where corrections will be bought into. We expect liquidity to be a key driver of markets on the back of improving macroeconomic triggers and earnings trajectory of corporates. For Nifty, 8820-8720 is a strong support zone, chances being the headline indices breaking away into a new unchartered territory.