Markets, the world over have cheered the positive statements coming from the two-day European Union (EU) summit. A rub-off effect was seen at the Indian bourses, too, with the markets also welcoming the clarification on the General Anti-Tax Avoidance Rules (GAAR). Nirmal jain, chairman, IIFL tells Puneet Wadhwa that the clarity will have a positive impact on future capital flows. Edited excerpts:
What is your reaction to the draft guidelines on the General Anti-Tax Avoidance Rules (GAAR)? How do you see the foreign flows panning out in the light of what has been said in the report?
The draft guidelines of GAAR, which were announced after the prime minister assumed additional role of the finance minister, has allayed fears of the foreign institutional investors (FIIs). The draft suggests that GAAR will not be invoked against promissory note (P-Note) holders. Further, only income accruing after April 1, 2013 will be subject to the provisions, implying that GAAR would not apply with retrospective effect as feared by many.
The dilution of GAAR comes as a big relief for equity markets and foreign investors and clarity on the taxation front would provide the much needed encouragement for future capital flows.
Do you think the markets have celebrated a little too early to the statements coming from the EU summit? Will this euphoria be short-lived?
To begin with, expectations were relatively low from the EU summit. A coordinated rescue operation is required to tide over the European debt crisis. On the first day of the EU summit, the European leaders have agreed to provide 120 billion euros to help some countries in the region to overcome their debt crisis. While it is sentimentally positive and reassuring in the near-term, global equity markets in the medium-term would be driven by successful execution of the plan and concrete signs of revival.
The last time we spoke was in February 2012. How disappointed are you with the way things have panned out for the economy and the global equity markets, including ours, since then? Has this made you change your view on where the Sensex and the Nifty could end FY13?
Global environment has not improved much with US recovery not matching expectations and a deepening of euro-zone debt crisis. Even worse has been the state of domestic economy. The target of fiscal deficit at 5.1 per cent seems optimistic. Widening of the current account deficit (CAD) led to a steep fall in the rupee. Inflationary expectations remain elevated as a fall in global commodity prices was offset by the rupee depreciation.
Q4 FY12 GDP (gross domestic product) growth at 5.3 per cent was a shocker and has led to downgrades in rating outlook by global rating agencies. Consensus GDP growth estimates for FY13 have shifted lower to five-six per cent in the absence of any major policy reforms. Tight liquidity environment and weak deposit growth has precluded transmission of policy rate cut. Q4 FY12 earnings season was disappointing with third consecutive quarter decline in net profit. As a result, there is a good chance that Nifty EPS (earnings per share) growth will be in single digit in FY13 versus consensus of 14 – 15 per cent.
Crisil expects India Inc’s revenue growth to be the weakest in the last six quarters in Q1FY13. Have you also toned down your expectations given the macro-economic headwinds? Can you give us a ballpark estimate of what you expect and the sectors that could perhaps disappoint?
The GDP growth moderation impacts corporate revenue growth with a lag. We have seen a sharp slowdown in economic growth from nine per cent to 5.3 per cent. Hence, corporate revenue growth would decelerate and remain weak in the forthcoming quarters.
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Revenue growth for the BSE 500 companies has fallen from 30 per cent in Q1FY12 to 17 per cent in Q4FY12. We expect the growth to range between 12 – 16 per cent in the coming quarters. Industrials, telecom and materials may continue to disappoint.
You were bullish on financials, consumption, auto and cement-related plays in February. How has this strategy paid off? Is it time to shift loyalties in the light of economic condition and how the markets may pan out over the next few quarters?
We like Sun Pharma and Torrent Pharma in healthcare, M&M (Mahindra and Mahindra) in auto, ITC in FMCG (fast-moving consumer goods), HCL Technologies and Mahindra Satyam in information technology and Bharti Airtel in the telecom pack. Cement stocks are unlikely to outperform in the wake of monsoons and the penalty handed down by the Competition Commission of India (CCI).
We have a stock-specific approach and prefer companies with strong cash flows, good governance, robust business visibility and low debt.
What are you advising your clients at the current juncture? Is it better to re-balance the portfolio with a bias towards defensive bets, debt and safe havens like gold?
At the current juncture, we would advise an investor with a moderate risk appetite to have a portfolio mix of equity: 25-30 per cent, debt: 50-60 per cent, gold: five to 10 per cent and alternative assets: five to 10 per cent.
