Budget math is credible: Abhinav Khanna

Govt's focus on the infrastructure sector is a step in the right direction, says Abhinav Khanna

The markets gave a thumbs up to most Budget proposals that sought to soothe nerves post the note ban impact. Abhinav Khanna, managing director and head of equity, Citi India tells Puneet Wadhwa that the government’s focus on the infrastructure sector is a step in the right direction, and it looks keen to continue on that path. Edited excerpts:

What are your key takeaways from the Budget proposals?

The Budget has balanced fiscal consolidation with growth stimulus. We believe that the Budget mathematics is credible and backed by achievable revenue projections. Gross tax revenue growth expectation of 12 per cent for FY18 is in-line with the nominal GDP (gross domestic product) growth assumption. It is good to see that the expenditure skew has shifted back to capex.

How are the foreign investors likely to view these proposals from a medium-to-long term perspective? 

Foreign investors are glad that there is no change to the long-term capital gains (LTCG) tax as this was one of the main worries in the run up to the budget. The confirmation that the indirect transfer provisions do not apply to Category 1 and Category 2 foreign portfolio investors (FPIs) is also a big relief. Overall, foreign investors believe that the Budget direction as well as the focus area is correct. Having said that, they are looking forward to this translating into stronger GDP recovery and corporate earnings pick-up.

Can one expect a higher allocation to India then? 

While India is a structural overweight for several FPIs, we witnessed selling pressure from them in the December quarter, primarily fuelled by redemptions and allocation away from Emerging Markets (EM) into Developed Markets (DM) assets. The strong US Dollar (USD) could still be a challenge for EM flows and India’s correlation to the US dollar is also quite negative, though less negative than other EMs. If India can demonstrate sustained higher growth and relatively more stable currency than EM peers, then we should see much higher allocation from foreign investors within the broader EM context.

What aspects did the Budget lack in?

While it is good to see the top down thrust on infrastructure and capex, investors would have been happier with more specific details on individual sub-sectors and a clearer roadmap on implementation. Some corporate tax rate cut for the larger corporates as well (in addition to the cut done for companies up to Rs 50 crore turnover) would have ensured even better continuity with respect to the roadmap announced earlier. 

Do you think the Budget has swayed on the populist side rather than boosting consumption, especially after demonetisation?

There is consumption boost led by the personal tax rate cut at the lower end of the income bracket. The increase in various digital initiatives will also support consumption growth. For broad-based economic growth in India, thrust towards rural is important as well. We do not take the rural thrust as populist but more as an essential measure for inclusive growth. In fact, the higher rural outlay (up 24 per cent vs FY17 Budget Estimate and up 11 per cent vs FY17 Revised Estimate) will also indirectly boost consumption.

Infrastructure has yet again found prominence in the Budget. What is your interpretation of the proposals and the road ahead for this sector?

This space has been a strategic priority for the government and we are not surprised by the renewed thrust here. The clear beneficiary seems to be rural housing where the outlay is up 50 per cent, while roads and railways have also seen good outlay growth of 11 per cent and 19 per cent, respectively. This, combined with attention given to rural infrastructure — roads, irrigation, electrification, housing and sanitation — seem to be a step in the right direction and the government looks keen to continue on that path. 

Do you think that the markets and the economy are fully reflecting the impact of demonetisation?

The impact of demonetisation may continue for a few more months. As of now, the ground situation and the corporate earnings indicate that the impact is less than what was feared when the measures were announced. With the removal of most of the restrictions on cash withdrawals, complemented by reasonably adequate new currency back in circulation and digital adoption, the pressure seems to be easing.

What are your estimates for corporate earnings for FY17 and FY18?

Our corporate earnings growth estimates for the Nifty50 for FY17 and FY18 are 12 per cent and 18 per cent, respectively. Pre-demonetisation, the numbers were 14 per cent and 17 per cent, respectively. We expect the demonetisation driven slowdown in H2FY17 to be mitigated by a stronger growth pickup in FY18. Financials, utilities and pharma are the sectors where we are overweight, while we are underweight IT services and consumer.

For the December quarter in particular, for the companies within our coverage universe that have reported till now, earnings are tracking 4 per cent higher than our estimates. 68 per cent companies have ‘beaten’ profit estimates while 32 per cent 'missed’. So it’s so far, so good!

What is your broad outlook for the markets from here on? Which sectors are you overweight and underweight on in the Indian context?

The positive triggers for the market would be: a) Earnings and GDP upgrades; b) reversal of EM to DM flow shift; c) GST certainty; d) stable rupee. Risks could be i) continued strength in the USD and faster than expected US rate hikes; (ii) further increase in oil and commodities prices; and c) drastic policy changes by the new US Administration.