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16 Nov 2016


Dear Valued Client,
Greetings from Geojit BNP Paribas!

The market is under pressure due to the liquidity issue caused by the demonetization of Rs. 500 and Rs.1000 notes while the increased global uncertainty is extending this fall due to likely changes in the US economic policies by the President –elect, Donald Trump.
Demonetization is a war against black money, and an imperative reform but it can impact the revenue outlook of the Indian corporate in the near –term. The biggest impact will be on cash related businesses like real estate, construction, consumer durables, gold & jewellery, NBFCs and FMCG. Hence, we are bound to see some downgrade in the earnings outlook for FY17, which is impacting the market now. Having said that, the extent of this impact will depend on how quick the government authorities, banks and common society can move towards adopting electronic transfer and the new currency.
At the same time, the upcoming changes in economic policies from Trump may add to the volatility in the Emerging Markets in the near –term. The global market is currently speculating on the future immigration reform, trade, geo –political issues and Fed rate hike. To get a better sense regarding any further impact on the market, let us analyze a worst case scenario.
Earlier, the market had a forecast of Rs.1,550 and Rs.1,825 for Sensex EPS in FY17 and FY18, which meant an earnings growth of 10% and 18% on a YoY basis. The growth in EPS for H1FY17 till date is only about 4% to 5%. 
The market was expecting about 15% growth in H2FY17 led by revival in domestic business. But now due to the unexpected liquidity reform we are likely to see some immediate cut in forecast. As a quick analysis we can assume that the growth for FY17 can reduce to 5% to 7%, while growth outlook for FY18 continues to be same. In keeping with this outlook, the updated Sensex EPS can be Rs.1,480 and Rs.1,750 respectively. The average one year forward P/E for Sensex was about 15.5x in the last 3yrs. Hence the fair value for Sensex stands at 26,750, while currently Sensex is marginally below the fair value. This analysis suggests that the market will soon find its worst case value and tend above normalization in expectation of a better outlook in FY18. This current liquidity issue of the financial market is a matter of few days to weeks.
We suggest that this is a onetime opportunity to invest since the long–term trend of the market is much stronger than earlier. We don't have to emphasize on the reform–led, strong improvement in the fiscal and micro outlook of India that we have experienced in the last one year. This fall in the market is largely attributable to the liquidity issue which has impacted small & mid caps and sectors with high cash related transaction as discussed above. This consolidation may continue in the very near–term, providing an opportunity to invest in high quality stocks at much cheaper valuations. 
This change in doing–business can provide a flip to the real economy in the long–term due to increased transactions from black to white or from unorganized to organized. Hence this ongoing correction and instability is a buying opportunity for blue chips, high quality mid caps and SIPs. One of the important sector which is likely to see a strong benefit from this demonetization reform is the financial and banking sector, led by increased savings in the regulated market.
Vinod Nair
Head of Research
Geojit BNP Paribas

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