Strategy: Exit polls 2024: No Drama by Kotak Institutional Equities

Exit polls for the 2024 Lok Sabha elections suggest a comfortable majority for the BJP-led NDA, led by gains in East and South India and continued dominance in its traditional strongholds. We expect (1) the equity market to be further energized by the polls (although the numbers are similar to pre-poll surveys) and (2) the government to continue with its economic agenda.

NDA may win 360-380 seats, as per exit polls

Exit polls for the 2024 Lok Sabha elections are predicting a comfortable victory for the BJP-led NDA. The exit polls' forecasts are broadly in line with the pre-poll surveys 1-2 months before the elections. Based on the exit polls, the NDA is likely to gain seats in South India, Odisha and West Bengal, lose a few seats in Bihar, Maharashtra and Karnataka and retain seats in its traditional strongholds.

Market positioned for a BJP victory, despite the recent increase in volatility

The results of the exit polls should not be a major surprise for the market. We note that (1) stocks with large leverage to the government's economic agenda (investment, PSUs) have delivered spectacular returns in the past 1, 3, 6 and 12 months, the Indian equity market has seen a modest increase in volatility in the past one month, but India's VIX is still lower than those seen during previous elections, suggesting less uncertainty regarding the election outcome among market participants.

Government agenda likely to focus on investment-led growth

We expect the 'new' government to (1) continue with its economic agenda of development, growth and liberalization and (2) focus on investment-led growth, with the recent large transfer of the RBI surplus enabling it to increase capex versus the interim budget. We believe that the government will continue its focus on key areas such as (1) affordable healthcare and housing, (2) energy transition, (3) infrastructure development (defense, railways and roads) and (4) manufacturing. We note that the government has already executed the bulk of the required reforms for incentivizing private investments. In 2019, the BJP's 100-day economic agenda focused on boosting investments.

Current multiples imply all of the above and then some

We find very little value in the market and, in fact, find most sectors and stocks overvalued relative to the fair value of the stocks, with the extent of overvaluation increasing in the inverse order of market capitalization, quality and risk; see our May 31 report Rightfully optimistic, mistakenly euphoric for details. Many narrative and PSU stocks are trading at outlandish multiples and are factoring in optimistic volume and profitability assumptions. A large BJP victory may sustain rich-to-bubble multiples in parts of the market (automobiles, capital goods, PSUs) for longer, but we would be surprised if many of the lofty embedded expectations come to fruition.

Source : Equity Bulls

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