As we approach the 2019 elections, we think that the Budget could be a balanced one but from the market perspective, we are not expecting any great reforms at this moment, said Sanjeev Zarbade, Vice-president – PCG Research at Kotak Securities, in an exclusive interview with Moneycontrol’s Kshitij Anand. Here's an excerpt from the interview:
Q) What are your expectations from Budget 2018? Would this time be populist one or would this time be a reformist one from the Modi government?
A) It is difficult to say but it looks like it will be a well-balanced Budget. If you look at the past track record of the government, the focus has been on the reform side and they have pushed through important reforms like goods and services tax (GST) as well as real estate regulatory authority (RERA) and we have a couple of other ones.
But now, of course as they are approaching the 2019 elections timeline, it could be a balanced one but from the market perspective, we are not expecting any great reforms at this moment.
Our focus would be on the fiscal deficit. Yes, there are some concerns that the government might miss out on the fiscal deficit target because the GST revenues have been to some extent on the lower side.
Our focus would be on the government’s plan to spend and kick-start the economy through further investment in the infrastructure and job creation industries.
Q) If you were the Finance Minister, what would you have done and talked about markets point of view, any reforms or any tweaks that would boost the sentiment?
A) We would like the government to improve the ease of doing business. That is one thing and of course, India has made major gains on that front. We improved our ranking by 30 notches but there is still a long way to go there.
If that is done then we can definitely attract a lot of investment into the country which will create plenty of jobs for the nation. Also, what we are seeing is that while the consumption growth is there in India, the investment cycle is still subdued and the private sector to a large extent is having problems with their balance sheet.
The onus is on the government to start spending. To some extent, they have been doing that and they have announced important plans like Bharatmala and Sagarmala.
What the market would like to see is implementation focus on this kind of schemes and if that happens then we would see that translating into improved gross domestic product (GDP) growth in the future.
Q) Anything from retail investors' point of view that they would want the government to do?
A) From a retail investor's point of view, not much.
Q) No tweaks for Securities Transaction Tax (STT) or something like that?
A) The demand is there but it has been there every year and the government has not obliged them. I do not think it will happen this time as well. The participants have started to live with the STT for some time.
Other than that some tax changes could be there but nothing material that we are expecting. I think as we saw last year, the focus was on fiscal deficit and right now even with the excise and customs are now within the GST.
I think what we may like to hear is something on railways what kind of investment they are doing. The government talked about large numbers of projects in railways, what is the investment pipeline over there and what is the status of dedicated freight corridors and any other future projects that are planned.
Q) 2017 is coming to an end and we are on a very comfortable wicket right now, plus 25 percent year-to-date (YTD) gains. How do you see the calendar year 2018 panning out for investors?
A) It is a difficult question. The general tendency of an investor is to expect the same kind of returns or extrapolate returns but that is not how the markets will function. The valuations are on the higher side.
Going forward, it will all depend upon how the earnings growth pans out. Most of the estimates are of around 25-26 percent earnings growth for next fiscal. This year it is largely a washout in a low single-digit kind of earnings we are expecting but next year, it has to be there.
To some extent, it will be helped by a low base also. We need a sustained global economic growth which will drive exports. I think that our return expectations need to moderate from what we have seen in last three-four years. So around 10-15 percent return in the coming year is still achievable.
Having said that, it would still be much higher than the growth rate that one expects in other asset classes, whether it is fixed deposits or maybe gold or even real estate, equity assets could still beat this kind of other asset classes.
If the earnings growth pans out better than 25 percent what we are projecting higher returns. It all depends on the earnings growth but by and large, the returns expectations have to moderate.
Q) You track midcaps very closely and this particular asset class has been an outperformer for the past five years. How are you seeing this asset class performing in 2018?
A) India has been a stock picker's market. We have almost 5,000-6,000 companies that are listed and till sometime back there was a feeling that a lot of midcaps are not investment worthy because of management issues, corporate governance issues and so on and so forth. The larger consensus was that they need to trade at a discount to their largecap counterparts.
That thing has changed to some extent. At least the valuation part has changed because I think that lot of midcaps are trading at a premium to their largecap companies.
There has been an improvement on the corporate governance front. There have been changes at the board level and management are aware of the benefits that come out of following a proper corporate governance program.
These are the changes and I think a lot of new businesses are coming into the market and getting listed like insurance. We saw three-four insurance companies getting listed and then restaurants and amusement parks.
The largecaps need better macroeconomic tailwinds to deliver. On the other hand, the smallcaps and midcaps are still small and within their market, they can still scale up even if the overall market may not grow at a fast rate — they have that room for growth.
I think that the going would be good for the smallcap and midcap companies provided they are able to manage their growth well and take care of the balance sheet.
A large part of this growth in the midcap and smallcap is because of the liquidity that we have witnessed in India, especially — domestic liquidity. That is also important. That has to come into the equation if we are looking at a five-year kind of a picture.
That is where I believe that this trend that we have seen of domestic liquidity is a structural trend. It is not something that it will vanish. We are having just around three-four percent of our retail assets in mutual funds and equity, on the other hand, it is almost 15-20 percent for the developed markets.
Q) So you expect more IPOs from the mid and smallcap space and 2018 could be the year when a lot of companies from the mid and smallcap space starts?
A) I am not sure if I can say gather the largecap. But yes, I think the investment sentiment is strong and investors, the good thing has been that in the last 1-2 years, I have not seen many poor IPOs coming to the market.
There has been a lot of learnings that has also happened. Since last 10 years and most of the retail investors are pretty satisfied and are looking for investing into IPOs.
Going forward, as well there will be a lot of interest. The valuations that midcap and smallcap companies are getting, we have never seen this kind of valuations — 30-35 times forward earnings.
There will definitely be a lot of listings, and fundraising that will come from the small and midcap companies in the future also.
Q) So any top bets from the mid and smallcap space which you are tracking which could be potential wealth creators?
A) In the small and midcap space, we like Mirc Electronics as you know, where this is the maker of the Onida brand of TVs and since the last 10 years they had a couple of setbacks. They entered the mobile phone manufacturing business which was not really their cup of tea.
They had a fire at one of their factories which took them back by 1-2 years. But, now they are rediscovering their brand and looking at growing their brand and t have started to cut their costs.
They have become more aggressive and given the kind of growth headroom that is there for consumer durables, there is very good scope for this company to actually do well from the current levels.
Then there are a couple of other companies like Saregama India. We came out with the idea and we are very positive on the product that they have come out with which is called Carvaan. They have come out with this product and it is priced at Rs 6,000-7,000.
The overall numbers can go to as much as one million sales. So, it can make a lot of difference to the company's profits in the next 1-2 years.
The third stock that we like is Eveready Industries India. This is the maker of the Eveready batteries and they have a market leading position in that space. They are also now using their brand to get into kitchen appliances. That is a very small market but doing it at a very fast pace.
Voltas, there are not many branded players, not many known players in the kitchen appliance space. So, recently Voltas has tied up with a Turkish company to offer products in India. So that is something is looking exciting. - Money Control