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The 2022 state election results did not deviate much from the average trends predicted by exit polls. The anti-incumbency factor did not really play a significant role (similar to the 2021 state outcome) in changing the dynamics, except in Punjab. While the BJP has retained all the four states with minor losses in seats, the AAP has emerged stronger in Punjab, toppling the incumbent INC. With this, the INC is now in power in only 5 out of the 30 states

The outcome in UP was eyed the most to see if the BJP could repeat the remarkable performance of the 2017 state elections and make history by getting re-elected with the CM completing his full term. UP sends 80 legislators (15%) to the Parliament. Although the BJP has lost some seats vs. 2017, it has maintained the vote share. The INC, on the other hand, is consistently losing its hold, with a sharp dip in the vote share vs. 2017 in Punjab. The strong political stability for the BJP and PM Narendra Modi boosts the party’s prospects for 2024 general elections and implies policy continuity.

Even with policy continuity, the poll results are not likely to impact markets’ direction much, and the focus will be squarely on how policymakers minimize the economic cost of the geopolitical quagmire. As we parse the macro impact of higher energy prices, we understand the situation is still fluid. However, with Brent possibly averaging $100/bbl in FY23, it could imply inflation above 5.6%, the CADto-GDP ratio above 3%, and growth below 7.5%. However, our prelim assessment suggests aggregate Nifty profits to be fairly resilient in this downside scenario, with scope for a roughly 30%/20%/10% cut in the aggregate FY23E PAT of Auto/Cement/Consumer stocks in the Nifty.

No major deviation from exit polls; BJP and AAP big winners

The state election results have not really thrown up a big surprise vs. median estimates shown in the exit polls. The incumbent Bhartiya Janata Party (BJP) is set to form the government again in the bellwether state of Uttar Pradesh, with a resurgent Samajwadi Party (SP) gaining a significant number of seats over the last Assembly Election but still set to finish with around half of the BJP’s seat tally. In Punjab, the Aam Aadmi Party (AAP) has recorded a historic win, dislodging the ruling Congress Party to the second place and showing signs of being a credible contender at the national level. The BJP has also forged ahead in Uttarakhand and Manipur, and while results in Goa are closer, the BJP is poised to be the largest party there too. The key national level opposition party, the Indian National Congress (INC), has continued its poor performance and now has only two chief ministers, and is part of the government in only 5 out of the country's 30 states. This strong political stability for the BJP and PM Modi may augur well for 2024 general elections and implies space for policy continuity.

BJP reaffirms its leadership position in Uttar Pradesh, while AAP emerges stronger in Punjab

All eyes were on Uttar Pradesh – it has a population of more than 230mn and sends 80 legislators (15%) to the Parliament -- to gauge if the SP could pose a realistic challenge to the BJP. However, this has not proved to be the case – BJP was leading in 249 of 403 seats as of 5pm. This marks the first time in over three decades that an incumbent party has returned to power in the state with the same CM. While the BJP managed to secure the majority, its margin of victory is likely to have dipped from 2017 in terms of seats. In terms of vote share, the BJP has gained marginally (~2%) from the 2017 Assembly election, while the SP has increased its vote share by 10%, and the BSP has lost nearly the same proportion. Further north, the AAP pulled off a stunning victory in Punjab, winning/leading in more than 90 of the 117 seats up for grabs. This has relegated the Congress to a distant second place, with a negative vote share swing of over 15%, while the AAP has increased its vote share by nearly 19% over the 2017 Assembly election. This is the first time in Punjab’s history that a non-Congress, non-Akali party will form the government, and it marks a significant milestone for AAP, putting it in power in a second state, after Delhi.

Policymakers to get back to the task of minimizing economic cost of global commodity shocks

While the strong political outcome for the BJP implies space for policy continuity ahead, the market focus will be back on the evolution of the geopolitical shocks and policy responses, with policymakers’ focus to be squarely on minimizing the economic cost of the same. With Brent prices likely to remain elevated in the near term, the economy could face a discernible adverse terms-of-trade shock, which would simultaneously pressure growth, inflation and external balances. As we parse the macro impact of higher energy prices, we understand the situation is still fluid. However, with Brent possibly averaging $100/bbl in FY23, it could imply inflation above 5.6%, CAD/GDP above 3%, and growth below 7.5%. However, our prelim assessment suggests aggregate Nifty profits to be fairly resilient in this downside scenario. Earnings resilience comes from the Big-4 sectors that will either benefit (Oil & Gas, Metals) or will see the least or a negligible impact of higher crude and commodity prices on their growth and profit margins (IT, Banks). However, we see scope for a roughly 30%/20%/10% cut in the aggregate FY23E PAT of Auto/Cement/Consumer stocks in the Nifty.

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