In conversation with Jinsy Mathew, Varun Goel, Head- Portfolio Management Service, Karvy Stock Broking shares his views on the Interim Budget and its impact on market.
How do you read the Interim Budget? What are the key takeaways?
The key number to wtch out was the fiscal deficit number. I think the FM has kept his promise of keeping the fiscal deficit in control, although the way in which this has been achieved is less than satisfactory. Being a Vote on account, not much was expected anyways from today's event. Excise duty cuts for manufacturing is definitely a positive step. Auto sector is on the largest employers in the manufacturing space and any demand increase there will boast the overall economy
Fiscal deficit for FY15 is pegged at 4.1%. Would you term this as ambitious?
waiver of pending interest on education loans is a populist step and creates a moral hazard for this segment
The fiscal deficit target of 4.1% is definitely ambitious. The FM has under-budgeted for food and fuel subsidies. The tax collection growth of 19% for next year also looks ambitious. Unless there is a significant revival in the economy, revenue side will continue to disappoint.
What are your views on FM's forecast of 5.2% GDP growth for the next year? Are they achievable ?
We believe that this is easily achievable. The potential growth rate of economy is running around 6%. The growth rebound to those levels can take place quickly. Assuming right measures are taken by the new government to revive the capex cycle, GDP growth can rebound to 6% in FY15. The agriculture and services sector continue to show strong traction and gradually even manufacturing sector should pick-up as consumer demand revives. Continued recovery in US & a stable Euro area will also support the recovery.
Would you go long on auto names post the excise duty cuts announced today?
two wheeler and SUV space will definitely benefit from the excise cuts announced today. There is reason to become more constructive on these segments. In the commercial vehicle and four-wheeler space, the demand slowdown is severe and as such a mere excise duty cut might not be able to revive demand significantly. Lower interest rates are a must to revive demand here
What is your take on the capital goods space?
The slowdown is capital goods space is severe. A small excise duty cut will not make a big impact. Some large infrastructure projects will need to be identified and concerted push will be needed to drive them to completion. Dedicated Freight corridor between Mumbai & Delhi is one such project. Quick execution of such projects will provide massive employment, provide quick transportation for goods, lead to productivity gains and will have large trickle down effects on the adjoining towns and villages leading to revival in consumption demand. Several ‘shovel- ready’ projects should be provided viability gap funding wherever needed.
Govt earnings from PSU dividend has jumped to over Rs 88,000 crore. In light of this data, should retail investors be wary of investing in PSU names?
Disinvestment programme has come to a standstill since the time UPA come to power. Although there have been minority stake sales, no change in management control of public enterprises has happened in the last 10 years. As a result, several large government entities have become inefficient and sick & have lost out to competitors in the last few years. Public sector companies have massively underperformed their private sector peers on financial parameters and equity market returns in the last 10 years.
The best example is BSNL, once a telecom giant with valuation of 100 billion dollars, is now sick and dependent on government aid to pay its employee salaries. Whereas Maruti Suzuki which was disinvested during NDA time, remains India’s biggest car manufacturer with a 50% market share and remains extremely profitable. Disinvestment can lead to better utilization of national resources, better delivery of goods and services to customers and increased productivity. PSU names are unlikely to do well in the short term
In terms of equity, how would you align your portfolio?
Despite so many negatives, plaguing the economy, all is not lost. If the new government takes decisive measures, growth can revive. The potential growth rate of economy is running around 6%. The growth rebound to those levels can take place quickly. A real GDP growth of 6% along with Inflation of around 7% should lead to a nominal GDP growth of 13% leading to earnings growth of around 14-16%. With interest rates not expected to increase a lot, we have turned positive on interest rate sensitive sectors like banks and automobiles.
Public sector banks are trading at quite cheap valuations and we expect significant outperformance from that space in the next two to three years. Capex cycle will take some time to revive and we will be cautious on the space for now. We expect export oriented sectors like IT and Pharma to continue to benefit from the significant rupee depreciation seen last year.
