Triumph over $5 trillion as dividend whopper cheers market

Sensex and Nifty both closed at record highs on Thursday (Shailesh Andrade/Reuters)
Sensex and Nifty both closed at record highs on Thursday (Shailesh Andrade/Reuters)


Foreign investors who have been largely sellers of Indian shares for the second straight month in May, led Thursday's rally. Market experts believe the rally could continue over the two weeks leading into the Lok Sabha election results on 4 June.

Stock markets raised a toast to the central bank's dividend bonanza on Thursday as hopes of lower interest rates calmed election jitters, lifting stocks to new highs and making investors wealthier by 4.2 trillion overnight.

Foreign investors trooped in after selling for two months, lifting India's stock market -- the world's fifth-largest and snapping at the heels of Hong Kong -- to a closing high of $5.05 trillion. Foreign portfolio investors (FPIs) bought shares worth a provisional 4,670.95 crore on Thursday, while domestic institutions settled for 146.51 crore.

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The last trillion-dollar addition in market value from 5 December was led by bluechips including Reliance Industries Ltd, ICICI Bank Ltd, State Bank of India Ltd, Mahindra & Mahindra Ltd, and Bharti Airtel Ltd. 

This is the second consecutive year where the actual dividend is more than twice the initial budgeted number, which may lower government borrowings, lift capital expenditure and bolster economic growth. Market experts now believe the rally could continue over the two weeks, until the Lok Sabha election results on 4 June.

In an interview with Mint earlier this week, veteran investor Jim Rogers said he regretted passing up the chance to invest in India. However, he said, he will enter the market when the perfect opportunity arises, biding his time till then.

Both the Nifty and Sensex indices rallied 1.6% each to fresh closing highs of 22,967.65 and 75,418.06. The Nifty fell short of the 23,000-mark by just over six points intraday, clocking a new life-high of 22993.60. The Sensex kissed a fresh intraday high of 75499.91. The Nifty Midcap150 hit a fresh high of 19575.25 and the Nifty Smallcap 250 surged to 15972.85, as the broader markets joined the party.

Bank stocks lifted off, following the central bank's blowout dividend transfer of 2.1 trillion, which is twice what was expected by the market. Investors expect the record payout to help the government meet the fiscal deficit target in FY25, reduce borrowing, cool bond yields and bring down interest rates. The dividend also gives the government more headroom to spend on its ambitious capex plans.

On Wednesday, the bond market was quick to take note of the dividend announcement, with yield on the benchmark 10-year government bond dropping 5 basis points to 6.99%, the lowest in nearly a year. The market was closed on Thursday. 

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Of the five top Nifty movers, which contributed to over half of Thursday’s rally of 369.85 points, three were banks – HDFC Bank, which contributed 57 points to the Nifty rally, ICICI Bank (37 points) and Axis Bank (25.29 points). Indeed, sectoral index Bank Nifty outperformed the benchmarks, rising 2.06% to 48768.60. The other top sectoral index performer was another rate-sensitive, Nifty Auto, which rallied 2.25% to 23849.25.

The hefty dividend will reduce government borrowing, and consequently, lower fiscal deficit, said Nilesh Shah, MD & CEO, Kotak Mahindra AMC. "The lower deficit would result in a decline in cost of borrowing for corporates over time which will be reflected in higher price-earnings multiples. If the money is used for infrastructure spending, it will create a multiplier effect with wider benefit," Shah added.

For now, financial stocks, which enjoy a third of the Nifty’s weightage, are expected to drive the rally into the elections.

“Banks, which have been laggards, could drive the rally further, given expectations of lower fiscal deficit, thanks to the RBI dividend, and a rise in their treasury income as interest rates are expected to decline, going forward," said Andrew Holland, chief executive officer at Avendus Capital Alternate Strategies. Lower interest spell good times for rate-sensitive sectors like banks and autos.

Traders covered bearish bets in Bank Nifty futures contracts that expire on 29 May, and added fresh bullish positions to Nifty futures contracts expiring on 30 May. The Bank Nifty contract's open interest (outstanding buy-sell contracts) fell 3.39% as the index rose, signalling short-covering, while the Nifty contract’s OI rose 5.16%, indicating fresh long creation.

The Bharatiya Janata Party (BJP) will score a record number of seats in the Lok Sabha elections, and the markets will hit a record on 4 June, Prime Minister Narendra Modi stated in an interview with The Economic Times.

Looking ahead, the first 100 days of the new government and the upcoming Budget will be crucial events, Holland of Avendus Capital said.

Typically, the fear gauge India Vix drops when the market rises and vice-versa; however, on Thursday, even as the market scaled fresh highs Vix fell a mere 0.4% to 21.38. Vix has almost doubled this month as investors stay glued to the results of the Lok Sabha elections. However, analysts are confident the rally will continue past the 23,000 mark in Nifty before the election results are out.

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“We expect a short-term rally either leading into elections or the week after results, potentially breaching our 23K Nifty target and then a profit -booking as the reality of execution and valuations emerge," Venugopal Garre and Nikhil Arela of Bernstein said in a note dated 21 May. The sectors that will lead are infrastructure, manufacturing, domestic cyclicals and some financials, the report said. It expects sectors such as consumer and IT to lag and small and midcaps to do better than large caps for a few days.

Adding $1 trillion in less than six months shows India's economic resilience and strong growth outlook, which has attracted significant retail inflows into equities and boosted the markets, said Gaurav Dua, senior vice-president and head of capital market strategy, Sharekhan by BNP Paribas.

Said Jiten Doshi, co-founder and chief investment officer, ENAM AMC, “During this journey, once we crossed $1 trillion, for every trillion, we have taken about half the previous time to clock the next trillion". Over the last three decades, in US dollar terms, India's GDP has grown 10 times, while its market cap has grown almost 25 times, he added.

On Thursday, India's market capitalization stood at 144.7% of FY24 GDP, a multi-year high.

“The surge in the market capitalization of Indian equities was primarily driven by a surge in broader market indices (midcap and smallcap) including the PSU indices," said Dhiraj Relli, MD & CEO, HDFC Securities.

March quarter earnings have been largely in line with expectations, keeping the earnings trajectory intact for FY25/26, with an implied 13-15% earnings CAGR (compound annual growth rate) for Nifty companies, pointed out Naveen Kulkarni, CIO of Axis Securities PMS. “In FY24, earnings grew by 20%, indicating strong market returns driven by fundamental factors. Thus, it was a matter of time that India could touch the record of $5 trillion," he said.

“In FY24, earnings grew by 20%, indicating strong market returns driven by fundamental factors. Thus, it was a matter of time that India could touch the record of $5 trillion," Kulkarni said.

However, not everybody is sanguine about the current valuations. As per a Kotak Institutional Equities report dated 19 May, “Valuation methodologies have low or no linkage to fundamentals, which makes high multiples palatable, no matter how outrageous the implied math for underlying parameters becomes at higher multiples. The current benign mood has resulted in much higher number of high P/E companies currently compared with history".

The Nifty 50 is currently trading at a multiple of 22.68 times, while the Nifty Midcap 100 and Nifty Smallcap 250 stand at 40.28 and 30.92 correspondingly. These figures contrast with the benchmark's five-year average trading multiple of 24.67 times, with the Nifty Midcap 100 and Nifty Smallcap at 36 and 28 times, respectively.

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