The outcome of the Bihar poll results are not expected to have an immediate impact on the economic reforms agenda of the central government.
The outcome of the Bihar poll results are not expected to have an immediate impact on the economic reforms agenda of the central government. The government enjoys a large majority in the Lok Sabha; the composition of the Rajya Sabha will alter only marginally. The market will likely focus more on the weak 2QFY16 results and weaker underlying trends. The Indian market is trading at reasonable valuations but will require the support of economic reforms, recovery and earnings.
1. Grand Alliance wins comfortably in Bihar; BJP-led NDA a distant second
The Grand Alliance (GA) of JD(U), RJD and INC established a decisive victory in the state elections in Bihar winning 178 seats in the 243-member state legislative assembly. The alliance led by the BJP polled 58 seats (see Exhibit 1 for detailed results). The exit polls were divided in their projections of the winner and had estimated that the vote shares of both the alliances will be very close. The final outcome of vote shares is meaningfully different with the GA getting 46% of the votes and the NDA polling 34%. We would construe the outcome of the Bihar elections as another endorsement of Indian citizens’ desire for economic development and better governance rather than a negative referendum on the economic policies of the central government. The state government in Bihar has had a good track-record on development and governance over the past 10 years; in fact, the BJP used to be an ally of the JD(U) for a larger part of the past 10 years.
2. Nothing much changes in central politics, at least not immediately
The market may be disappointed about its expectations of the NDA increasing its tally in the Rajya Sabha (RS—upper house of parliament). However, as highlighted by us before, the peculiar election process for the RS would have made it mathematically difficult for the NDA coalition to reach a majority in the RS for some time (see Exhibits 2-4). Bihar sends 16 MPs to the RS; currently there are 12 members from the JD(U) and four from the BJP. Five of these members (all JD(U)) come up for reelection in July 2016 and another six come up for reelection in April 2018 (four from JD(U) and two from BJP). Given the scale of the GA’s victory in the state elections, we do not expect the BJP to increase its tally in the RS from Bihar.
3. 2QFY16 results may be more relevant for the market
2QFY16 net profits of the 44 Nifty-50 companies that have reported and covered by us so far have declined 5.1% (see Exhibit 5). More important, EBITDA is down 2.9% yoy and 1.1% below our already muted expectations (see Exhibit 6). The underlying trends of volumes, order booking and NPLs indicate that economic recovery remains elusive. (1) Banks’ slippages and NPLs remain high; even some private banks reported high fresh slippages this time. (2) Revenue growth continues to be weak across all major domestic sectors as low inflation begins to pull down pricing and volume growth remains muted. (3) Industrial companies order booking has dropped sharply yoy. We will revisit these issues in detail in our results review report.
4. Valuations remain reasonable – reforms, recovery and results will be watched for
The Nifty-50 Index is trading at 18.8X FY2016E ‘EPS’ and 15.5X FY2017E ‘EPS’ (see Exhibits 7-10). Valuations appear reasonable but will become pricier as we expect further earnings cuts for our FY2016 and FY2017 estimates. We currently expect net profits of the Nifty-50 Index for FY2016 and FY2017 to grow 8.3% and 20.1%. We see downside risks to the market over the next 2-3 quarters until there is conclusive evidence of economic reforms and recovery and greater confidence in the Street’s earnings estimates.
5. Implications for reforms—depends on how the government plays it
The government may have to rely on (1) cooperative federalism (something which the Prime Minister has championed anyway) and (2) political management to reinvigorate legislation at the central level. Key economic reform bills including the GST and Bankruptcy Code are expected to come up for discussions in the winter session of the Lok Sabha. Even certain executive reforms will require the support of the regional political parties as the central government does not have the authority to legislate or decide on several economic matters. We see the recent power distribution sector reforms as the right way to resolve difficult economic issues. The central and state governments have jointly decided on a package of reforms for addressing the challenges of the power distribution sector.