Expect govt to cut taxes; wary of real estate sector:Nilesh Shah

Speaking to CNBC-TV18 Nilesh Shah, Managing Director at Kotak Mahindra Asset Management, said that it is better to wait for results from the demonetistiaon move.

He spoke about domestic institutional investors buying. He said that whenever markets have corrected below 8050, there is lumpsum investment. This is cash we are receiving on a daily basis and deploying into the markets, he said.

He is cautious on real estate sector as it has been witnessing a slowdown. Gold and jewellery is also one sector which is seeing a downturn.

He expects magic from the Budget. He would like the government to cut tax rates, spend more infrastructure and honour its fiscal deficit commitment.

He would like the policies to be more pro-reform than populist as it would determine the PE of the broader market.

He is not negative on FY18 earnings.

Sonia: Is the mood still sombre with respect to demonetisation because last time when we spoke to you, you were a bit cautious? Do you think that things could get worse in the first part of the year?

A: The appropriate word will be sombre because lot of things, which are happening on ground, we are able to collect data on an anecdotal basis. So one side, we have seen that the rabi season crop planting is up 6 percent on an average. Then there is a feedback that these are not remote sensing satellite estimates, these are eye-catcher estimates and there could be some data discrepancies over here. We don’t know where the truth is. The gut suggests that if your reservoir water levels are above 10 year average hopefully rabi season should be good from a water point of view, from a moisture point of view but if cash shortages have created trouble in terms of buying of seeds and fertiliser, that could be worry.

So the market and we remain little bit circumspect. We want to see the data and then take a call and today lots of data is being thrown about, which is more anecdotal. It will be fair to wait for the results and also hear from companies how they are expecting their business to shape up in Q1 FY18.

Latha: Yesterday there was a very big domestic institutional investor (DII) number, you suspect it as NAV propping?

A: No. I don’t think so. Now we are in a market where we have to prop our NAVs at a quarter end. We are being evaluated on a daily basis. This DII buying is purely function of level of the market and the stock, which are available. We have been receiving fair amount of flows, there are almost 1.15 crore SIPs giving us Rs 3,800 crore every month and what we have seen is that whenever markets have corrected below 8,000 Nifty then there is a fair amount of investments to systematic transfer plan. So this is the cash which we are receiving on a daily basis which we are deploying in to market whenever opportunity arises, gone are the days where I was judged based on my quarterly performance and judged now on a daily basis.

Latha: From the anecdotal evidence you have so far, what are the sectors that you would be wary off in January?

A: Essentially the one big sector to worry will be related to real estate. Clearly, there is a slowdown happening over there in terms of fresh supply as well as construction. So every sector related to real estate could be cause of a concern. The second thing is related to gold and jewellery. Clearly, there also there is a drop contrary to claims that because of demonetisation gold prices will shoot up. Post demonetisation they are down about 10 percent. So gold jewellery and distribution is one another sector where one needs to be careful.

My guess is that, going forward, it is far more going to be how much of bad news has been priced into the stock price. At a price even some of the depressed sectors will be a buy and at a price, some of those well performing sectors also will be a sell. So going forward, it is going to be far more stock specific market. How much of news has been priced into that stock?

Sonia: Now that the demonetisation is over, the focus will now shift to what the government will do in order to stoke an economy which is low on cash. What are you expecting from the government this Budget?

A: Essentially I expect a magic from them. I expect them to cut tax rates so that consumption gets boosted, I expect them to spend money on infrastructure so that the slowdown in private capex can be compensated to a great extent and I also expect them to honour that fiscal deficit commitment which they delivered in last Budget at 3 percent of fiscal deficit for FY2018. So essentially I am expecting government to raise revenue through innovation.

We believe in demonetisation as per today’s headline about Rs 4 lakh crore has been deposited which could be whether they have passed through the tax net or not is debatable. If you can go after that Rs 4 lakh crore worth of deposit and you can catch them under Pradhan Mantri Garib Kalyan Yojana or through some other mechanism, that is potentially tax collection of 200,000 crore, that is good enough to give tax concession, that is good enough to spend on infrastructure and that is still good enough to maintain your fiscal deficit commitment. So essentially I expect government to be innovative in terms of spending as well as raising revenue.

Latha: Do you think that sectors like sugar is what one should take interest in?

A: From a portfolio point of view, clearly sugar is a very small sector, very cyclical sector and a lot of political overturns over there. It hasn’t created wealth for investors over a period of time. So, if you are capable of trading, certainly this is one sector where you should trade but if you want to create long-term wealth, investing in sugar stocks have not created as much sweetness in the portfolio as sugar has created in other things.

Latha: This should be a rural distress relieving Budget, how does a stock investor play it?

A: Essentially we are looking at whether good economics is good politics or not. Clearly, post Budget there is Uttar Pradesh (UP) election and in two and a half years there will be general elections. Till now market has been confident that good economics will be good politics. So many steps taken by the government has been pro-economic reforms, pro-growth and they have taken bitter pill in order to set up good economic foundation.

In this Budget, we want same trend to continue. For example, sugar sector if there is a concession being given in order to make sugar sector competitive from a market point of view, market will be more than happy to accept it for sugar stocks as well as for broad market. But if concessions are being given in order to win UP elections then certainly sugar stocks will do well but overall market can come down. So essentially we want continuity of government’s pro-economic, pro-growth, pro-reform policies in Budget rather than populist measures to win election. That is going to determine the valuation or the P/E of the broad market.

Sonia: What about the other big factor, earnings, many people are indicating that FY17 will be a washout, FY18 could also be a wash out because we don’t know how long the ramifications of demonetisations could last. What are you factoring in and when do you see the first signs of recovery come through?

A: We are not that negative on FY2018 partly because there was a momentum, which was building up in FY17. Good monsoon and Seventh Pay Commission did result into good festival seasons between Diwali and Dussehra. Demonetisation did create a short-term impact, now how short is short-term is something we have to figure out. In FY2018 there is a good opportunity for earnings to recover provided government presents a Budget, which is while fiscally committed to prudence is also spending and giving boost to consumption as well as infrastructure. RBI maintains liquidity in the banking system to spur economic growth. Third, they cut interest rates at least by 50 basis points (bps) to ensure that the consumption and leverage buying can revive. Combination of these three things on both monetary and fiscal side could see earnings recovering in FY2018.

Need more incentive to improve digital infra: Chandrababu Naidu

Supporter of the demonetisation move from the start, Andhra Pradesh Chief Minister Chandrababu Naidu says that the situation is improving due to increased circulation of Rs 500 and Rs 2,000 notes and the need to expand mobile currency is very important.

In an exclusive interview with CNBC-TV18, Naidu says that there has been a big jump in the use of mobile currency in Andhra Pradesh after the cash ban and the government is trying to introduce 1 lakh bio-metric devices by next year.

He further says the government needs to give more incentive to improve digital infrastructure and push the use of e-payment modes.

Q: Could I ask you to tell us what the situation on the ground is in the state of Andhra Pradesh? If you talk to chief ministers of Kerala, West Bengal, you talk to some of the Congress leaders, I would hope that beyond the political differences and political ideology what they are giving us is a true picture and they seem to believe that things have not really improved, that things continue to limp back to normalcy of some degree. What is the situation in your state?

A: In the beginning there was a big problem because of currency and also we were not prepared for digital economy. Today day by day situation is improving because of Rs 2000 and Rs 500 note and smaller denominations. However we had to managed very effectively. Simultaneously we had to go for mobile currency which is very important.

Even yesterday I had a meeting in Delhi, I discussed with chief ministers and also technology experts and we have arrived at three ways of going for mobile currency, one is, Aadhar Pay. For Aadhar Pay only one smartphone merchant should have and at the same time biometric device if you can attach, it will work as a micro ATM. Even consumer will have only Aadhar number and also bank name and automatically you can transact.

Second way even feature phone and also smartphone, we are having nearly 60 crore phones. USSD they have simplified the new version and it is very easy to transact.

Even UPI has a network as on today of 33 banks and also interoperability they have brought in. More than 103 banks they have synchronised Aadhar account.

Third way, swiping only card. Card maybe Jan Dhan card, RuPay card or Mastercard or Visa card, we need swiping machines, either ATM or micro ATM or e-PoS or m-PoS, these are all the machines we need and then automatically transactions can be done.

Q: The committee has decided that you will be importing at least e-PoS machines, 1.8 lakh m-PoS cost effective machines and I understand that this business of importing these machines will start in January 2017 but if I could ask you about the impact on the economy of the state, the impact as far as revenue is concerned because this has been one of the concerns raised by state finance ministers at the meeting of the GST council. Can you tell us whether you have seen job losses both in the formal as well as the informal sector especially in the construction sector, whether demonetisation has impacted your own infrastructure development plans for the state?

A: As of today there is some impact especially October effect is not there that much in November. December there is impact. January it may have some impact. How fast we can go for mobile currency is important issue here. What is economy? Somebody has to produce and somebody has to consume.

If nobody is consuming, nobody is producing, nobody is paying salaries, then there is a problem. Infrastructure or construction or any activity in small traders, everywhere that problem is there. However in Andhra Pradesh in one weeks time we are able to reach 25 percent mobile currency and that is a big quantum jump.

Q: I understand that you have an ambition to actually take Vijayawada cashless very shortly, how are you planning to do that, what is the timeline that you are working with?

A: This is very clear, I told you, mobile currency there is only three ways – aadhaar pay, mobile phone, and swiping. For all these things we need infrastructure. Wherever there is low hanging fruit, we want to tackle first. Everybody is having a Smartphone, even kirana shop owners. They need only biometric device; it is costing Rs 2,000. I am giving Rs 1,000 subsidy. We are getting machines within the country, even we are importing. Next month we are planning to put in the market nearly 1 lakh biometric devices. If I put 1 lakh biometric devices, 1 lakh shops, they can operate this; that is very easy.

Q: What is going to be the cost of all of this? Is there an estimate on the kind of cost that the government will incur whether it is the central government or the state government for the import of some of these machines whether it is the EPOS, MPOS or the biometric machines?

A: What I am saying — simplest way, everybody is having Smartphone, Android phone. We have to add one biometric device; it is costing Rs 2,000. Rs 1,000 we are giving subsidy from government side. Suppose 1 lakh, it is costing nearly Rs 100 crore – we have to spend that amount of money then it will happen. That is how we are working in a big way.

Q: We have now got two big events coming up. We have got the Budget in the month of February, February 1, and then you have the possibility of the GST rollout. The government says it is still working with April 1. Let me start by asking you, do you believe April 1 2017 rollout for the GST is still doable or are you now realistically working with July 1 target?

A: I am preferring July 1 they have to rollout. Now everybody is waiting for that. Government of India has to bring some more consensus and then move forward. Second, even this committee on demonetisation, we are going to give interim report immediately with all these recommendations. Also, final report, it will take some more time but interim report we are very keen to give it to Prime Minister first week of January.

Q: What will that interim report essentially say, what would the action agenda be that you propose to the Prime Minister when you submit that report in the first week of January?

A: There are three ways of mobile currency. If you want to encourage mobile currency, digital currency cost of transaction should be lower than physical currency; that is the fundamental rule, then only people will move in that direction. Second, there is a big gap with hardware. Even MPOS, EPOS, Smartphone, Biometric device, all these things there is a problem. Third, backend from bank side, either servers or cloud or programming, software, they are having problems, that we have to address.

Communication, infrastructure, even there is a bandwidth problem; some areas we are having and some areas we don’t have, that we have to strengthen. Then ultimately we have to train people. Somebody is having cellphone, he is standing in queue for hours to draw money from ATM. He is unable to transact through mobile. The problem is very clear, it is attitude problem — how to train, how to motivate them.

Q: So, give the constraints that we are dealing with and you articulated several of them on the infrastructure side, on the skills side, on the financial literacy side, when do you expect normalcy to return? The government is still hoping that the process of remonetisation will continue to gather pace but when do you expect normalcy to return all over India?

A: It all depends upon governments, bankers and RBI. If we can take proactive steps, give incentives for the traders and also digital transactions that is mobile currency, cost of mobile currency will be cost effective, then people are very intelligent, they will shift immediately.

Rs 500 and Rs 2000 notes are there but in rural area still there is a problem either for farmers or poor people, those who don’t know how to operate also, these are the problems we are facing. So, better way is as far as possible we have to take mobile currency in urban areas to maximum extent. In rural areas for some more time some more cash you have to manage and then it will balance.

Q: Let me ask you about your expectations from the Budget because the hope is that this Budget in a sense is going to try and counter the negative impact of demonetisation, it will provide a stimulus to the economy. What would your Budget wish list be from the government?

A: Demonetisation in the long run is more advantageous for the nation. We can control corruption, we can control parallel economy, black money, we can improve efficiency also. With digital we can have advantage for the common man as financial inclusion, everything we can bring. However government of India and also state governments have to have incentives for infrastructure, hardware, financial literacy and how to do all these things in a fast manner is very important and that is what we are going to recommend in our report to the government of India.

Q: Let me end by asking you, we have heard from the Chief Minister of West Bengal, we have seen the Congress party saying that this has had a very negative impact as far as the rural economy is concerned, as far as the poor of the country is concerned. Do you believe that is an exaggeration, are you seeing distress at least in rural parts of Andhra Pradesh or do you believe that people in their attempt to try and support this move and we have seen resilience across India, do you believe there is an exaggerated picture of distress that is being presented by some political parties?

A: I want to appeal to everybody. Now, Rs 500, Rs 1,000 demonetisation is over. There is no way to bring back. Issue is how to go for digital economy and also how to overcome this crisis is very important. It is a major reform; naturally there is some problem in the initial stage. People are patiently waiting.

Also, if you see long queues, so much of time they are standing in queue but they are thinking for bright future they are suffering today, they are sacrificing today; that is the attitude of the people. However, in the beginning, over a period of time there is suffering. At the same time, they are taking the suffering also for a bright future tomorrow. That is where all of us have to deliver now.

See at least 200 cos showing growth; recovery on: Motilal Oswal

Speaking to CNBC-TV18 Raamdeo Agrawal, Joint MD at Motilal Oswal Financial Services, said the new year will be starting slow for earnings in the wake of the demonetisation.

He believes that there will be about 200-300 companies which will be showing growth. It is not looking to be a buffet dinner, he warned.

Although the pain still exists from government’s move to ban popular currency notes, a lot of recovery has taken place, he said, adding that recovery is more visible than what media reports lead you to believe. “Mumbai is normal,” he said.

Sources have told him that auto revival is around the corner. By January, liquidity crunch won’t remain, he said.

In the upcoming Budget, housing as usual will be a big theme. Purchase of gold and real estate could also go digital, he said. Although this cash ban is meant to flush out tax evaders, it should be a continuous process.

Recently, the PM and FM released contradictory statements relating to long-term capital gains tax. Talking about it, he said whatever comes out of it, it has to be viewed as a part of the larger reform package on taxes. “You have to see it in toto. The government is keen to mobilise more from the corporate sector. My sense is that  you should keep reducing the tax rate by 1 percent, 2 percent every year.”

He believes that eventually tax evaders should be incentivised to report more of their undisclosed income.

Stronger companies will prevail, and emerge successful, he said.

Latha: How would you look at 2017, from a valuation front, earnings front? Should we expect the first half of the year to really give us gains?

A: Whatever we discuss about six months, one year it all goes wrong. So, the caveat, I am just putting it. Last year we said we will make 15-20 percent, we are struggling with being in positive. But then still one tries to understand what could happen in next year or so. Clearly this year is starting slow earnings wise and even aggregate earnings wise last year was also – though the analysts they all projected 15-20 percent kind of growth, again people are projecting 2017-18 to be a blast year with 20 percent. Somehow it didn’t materialise. So, if you are not seeing generalised market earnings to be exploding price-to-earnings ratio (PE) side, as I said, we are at 20 PE trailing twelve months (TTM) because TTM is the only reality, rest all is projection. So, we are 20 times which is not low. The highest range is about 20-22. So, there is not much scope there. So, earnings must respond. If the generalised market is not responding you have to go to the places where it is going to be there.

I know 200-300 companies whether you get them or not they will be there. In any given point of time they will grow. They will find their ways off one Maruti Suzuki, one Eicher Motors, one Bajaj Finance, one housing finance company here. You will find some 200-300 companies. So, it will remain very selective. At this time it is not looking to be a big buffet dinner. You have to select, a la carte is better.

Sonia: We have also seen the demonetisation impact. Nobody has been able to gauge just yet but I know that a lot of your research analysts especially auto, cement have been doing channel checks. What is the feedback so far?

A: India is such a large country; south behaves very differently from north, north has arid impact of the severe winter and all, so you cannot really figure out and when the quarterly results come on a pan year basis then you can figure out because in some places if you go in the second week of post demonetisation in November then reactions are like horrifying. If you go now in the same places a lot of recovery has taken place, in fact I see that recovery is much bigger in reality than what the media works out to be. When you open the television you find still the country is in deep dark. Mumbai is completely normal, our ATMs have money. It is more of Rs 2,000 note but liquidity — I don’t see any problems in most of the places but in media it is made out to be lot more.

Sonia: What about rural checks? There as well things are coming back to normalcy?

A: Yes, everywhere. Automotive demands are very good measure of seeing that.

Latha: Can we generalise because in November Maruti Suzuki did fine, it was the two wheelers which showed a lot of pain. What are your channel checks saying?

A: I spoke to a few people four-five days back and they said urban is back 70-80 percent, rural is still down 50 percent back, that was seven days back, but it is recovering very quickly and even a week is making a lot of difference. So, we have to be hopeful that by end of December maybe January at least liquidity effect will not be there. Then the consumer behaviour will change or if you don’t give them money, the withdrawal limits, how fast they remove that will bring a lot of transactions normalcy. Impact is there still but it is fading away very quickly.

Latha: You are always the man who plays for the longer term and plays micro, but nevertheless I have to ask you this macro question. The Budget is coming. We just had our own correspondent breaking the news that it could be big on rural, giving some help for farm related sectors as well as for housing. Is that a theme you will want to play anyway with or without the Budget?

A: This has been the theme even last year. It is not any significant – this government has always said we want housing for all by 2022. So, housing being a big theme was always there. Rest all rural, for socially deprived lot that goes on and that is the Budget actually. They have to collect money from Dalal Street and spend in rural India. So, that is the Budget.

How the tax to gross domestic product (GDP) happens? This is huge samudra manthan, we are going through and we have gone through. What actually comes out of it? Is there any lasting change in the behaviour of people in terms of paying taxes, going digital and the government is putting all efforts to see that larger portion of the economy becomes formal, you are providing banking facility, you are forcing people to take small salaries also in digital format. Some more values of the transactions, if they go digital, say purchase of gold, purchase of real estate in any case everything else has been bought through trail and the real issue is cost of evasion; is the cost of evasion high, people those who are evading, they know for sure that they can keep the cost of evasion very low, with whatever, their own effort and with the help of some people, they can keep cost of evasion low. So, even if you bring down the tax rate and if your evasion cost is low, people will keep evading.

Latha: Has not this exercise of the last eight weeks made people realise that the cost of evasion is very high, so why not pay. Will that behaviour change?

A: But that is a two month affair. Once in a lifetime it has happened. So, it should be a continuous affair. So, if you again can withdraw crore of rupees go and buy gold, go and buy plot of land and all people are already habituated for the last 60 years to do that they will go back to the old system.

Latha: I wanted your view also on all that chaos that happened with the long term capital gain (LTCG) tax and even if that doesn’t come there is anything, higher short term capital gains or maybe higher withholding, will it for the long-term be a positive if it comes through or do you think market could get spooked in the near term?

A: Let whatever they want to do, let them do it then only we will analyse. There is no point because it is not going to come standalone; whatever comes, will come by way of package. So, you reduce the corporate tax rate, you probably increase dividend tax, you probably decrease some capital gains tax but corporate tax is reduced. So, you have to see what exactly they want. They definitely want to mobilise more resource from corporate sector, but again evasion will go up if they put up the roads but Finance Minister looks to be pretty inclined to bring down that. My sense is if you keep reducing the tax rate by 1-2 percent every year and cost of evasion – be after them. So, when you increase the cost of evasion and compliance cost is low, somewhere there will be golden mean where people will say hell with all this black money, full day I have to chase this, let me just pay and be done with and that point will come where 90-95 percent of the people – there will be 5-10 percent of people, don’t chase them but 80-90 percent of people will comply at certain point. They are all law abiding people because government has to have trust in, so many people evading all over.

Latha: You are not going to tell you the next stock that is on your watch list, but what sectors are on your watch list and did you all crack that digitisation puzzle which we discussed at your gathering? What stocks may benefit because India may pay digitally?

A: There also it was confusion, we didn’t get any names.

Latha: Yes, we looked only at private unlisted names. A: Yes, so the situation remains same and more and more you will realise that it is a mode of payment which will become easier. It might bring more velocity to money. So, some of the well managed banks or the banks that have edge in digital payments and all but that edge also will remain short lived. In six months time all the banks will catch up, even the UPIs and government is also after their life to make it common across the platform. So, it is like saying another small currency note, which is benefitted. This digital is just a channel. It is a mode of payment. So, I don’t think it creates per se industry except for some people in technology which I am not aware of who will benefit, but in two-three months time – one is that lot of companies which were growing in the past just till September they will get back their momentum because nothing has changed fundamentally. Second, because of shift my sense is some of the stronger companies will emerge even stronger. So, you will see that the least fall is in Maruti Suzuki   and you will see the first company to recover will be Maruti Suzuki kind of companies.

So, we have to keep watching these stronger companies, how fast they recover and they are the guys who will gain market share from those who are not well organised. Whether it is in paint whether it is in cement whether it is every aspect of life. Stronger companies, quality companies they will gain at the cost of weaker companies.

Gains from expanding tax base will come in: Leo Puri

The demonetisation pain is likely to last till the end of current financial year, believes Leo Puri, MD of UTI Asset Management. The pain has already started easing with improvement in note printing.

Speaking to CNBC-TV18’s Latha Venkatesh, Puri said demonetisation will be very good for the market in medium term. “Benefits of this (demonetisation) in terms of expansion base is very real and very likely,” he said.

While 2016 has been a year of uncertainties, 2017 will bring realignment to the world. Even with foreign investors withdrawing from India, domestic investors have not dried up yet.

Puri expects analysts to once again turn overweight on India by middle of next year.

Q: Before I ask you the trends for 2017, the big event that we are sitting in is the demonetisation. What is your understanding of this process; is the pain going to last for this quarter, would it last for two quarters, that is the first part of 2017 or could it be a little longer?

A: I think pain is likely to last until the end of the financial year. I personally don’t expect it to persist much beyond that. I was happy to see that we have started to print notes offshore as well, so, more cash will come into the system. So, I don’t anticipate beyond March there will be much pain.

Q: Could there be knock on effects, do you see FY17-FY18 as a period where there could be some shadows probably because of the real estate sector or because of some permanent dislocation in the informal sector?

A: It depends on the larger view you take of demonetisation and how you view the overall picture.

Q: How have you viewed it?

A: I think there is one piece which is certain to me that the benefit of this in terms of expansion of the tax base is very real, very likely and I think is imperatively sound. The second element of this, is the leap of faith. You have to believe that the taxes that are going to be raised are going to be better used which means we are going to have a government that is actually committed to good governance.

There is an economic theory, one of the concerns that many people including people offshore have had, is that today we have functioning economy where our entrepreneurs are able to make things work. Some part of that is in the shadow economy but it doesn’t matter because the system, the supply chains and so on are functioning. We have absolutely put a stop to that now.

The leap of faith is when we restart that engine and you actually have a broader tax base, will you have a responsible government spending process where infrastructure, education, healthcare, the social security net, broadening of the formal sector, will that come into being or will we have another wasted opportunity.

I happen to be ready to take that leap of faith and say that we are at a point where this government, mid-term, is indeed committed to taking forward economic transformation, good governance, therefore the benefits are going to flow to us. That I think is a central divide here between the skeptics who fundamentally don’t see that anything is going to change and that this is just a one of intervention and a ill thought through, poorly executed intervention.

Others who say no this is part of a broader plan, you have had Jan Dhan, you have had goods and services tax (GST), you have had Aadhaar based UID, you are now going to get digitisation of land records, you have a broad movement towards expanding India’s tax base and formal sector and a government that is committed to get a governance and reform. So, isn’t that the best way to take us to being a middle income country and if you take that leap of faith then this is surely a good thing that is happening, very good for the markets over the medium term.

Q: You are beginning to convince me but the market out there is still deeply divided between bulls and bears, between skeptics and optimists. Let us just pause and speak about the markets. We have seen in the past eight weeks, the markets shed off goodish bit partly because of Trump and demonetisation hit us on the same day. Do you think we have much more to lose before the markets are able to pull themselves up?

A: The markets — of course we talk of volatility and uncertainty and I think that 2016 actually has been a year where for better or worse some of these uncertainties appear now to have been resolved. If you look at Brexit and Trump, they are answering questions as much as asking them.


They are answering the questions about is the world seeking a shift, a new paradigm, is it seeking to reestablish rules of global trades, globalisation, and you may not like the answers we are getting but we are getting answers and this is the problem – be careful what you wish for. Markets were wishing for certainty, we got certainty, it wasn’t the necessarily the certainty everyone expected.

However, you can’t argue any longer that we don’t have a better sense of where we are going. We are going in 2017 to a world where there is going to be realignment. Some of that realignment is geopolitical which is represented by the Trump presidency; we are seeing signs of that in East Asia, in the Middle East and with Russia. Some of that is economic which is the view on Fed interest rates and the impact that has already had on the dollar and by the way has spurred a tremendous rally in the US market. So, we are essentially seeing a very bullish wave in the US market as we speak.

Q: But that has also been a short emerging markets (EM) trade. The long developed market (DM) or the long US trade has also meant a short EM trade. Would you believe that there will be more to come as president Trump is sworn in on January 20th?

A: I think that is a temporary rebalancing. It had to happen at some point. I actually think it is a good thing that it has happened earlier rather than later because I think the rebalancing is to India’s advantage. What has happened at this point is, you have seen the dollar strengthening and to that extent you have seen a general pullback from emerging markets rebalancing. India is still at more or less neutral weight if you like within EMs. EMs have seen flows out; no one has gone underweight India just yet. They are either staying neutral to modestly overweight.

Q: But we have underperformed.

A: In-line with other emerging markets, we have seen that rebalancing which to my mind was inevitable. However, there are two silver linings if you like to this episode. One is that even as this is occurred, we have seen a stronger commitment to domestic economic reform and in a way I think the fact that we are seeing continued uncertainty in the west, further strengthens our own resolve and our own focus on the need to get our own house in order and the central bank and the ministry of finance I think are both acutely aware of that and you hear that in their statements.

So, I think it is a good thing that the world is keeping some pressure on us because we tend to operate better when we are under pressure. To that extent, flows in our domestic markets have not dried up. They have certainly tapered off somewhat but you are still seeing steady flows coming in through DIIs, mutual funds and so on.

The second is, if you hear the commentary on India, even as flows have receded from global investors, the commentary has remained very positive. Some hesitation because of demonetisation where people are little bemused trying to form a point of view, but broadly very positive commentary.

So, I absolutely anticipate, as faith and conviction builds around our economic reforms, as people sense that we are going to use the Budget that is promised to use the benefits of demonetisation, you will see come middle of next year India back in favour and back to overweight in most portfolios. So, I actually think 2017 will be a year of more certainty and more stability for our markets than 2016.

Q: I do hope that the foreign institutional investors (FII) tide turns because I just counted, in December itself it is almost a USD 3 billion outflow if you counted debt and equity, almost, and if you counted from November 8, it is probably USD 5 billion. Now, what has stood in favour of the markets as you correctly put it have been the domestic institutional investors (DII) flows. Now, there, you are at advantage point to speak to us about the Indian investor. Do you think the Systematic Investment Plan (SIP) flows will continue the way they have or as the markets go towards 7,600 or 7,500, that faith will be broken?

A: I think as of now, we have seen virtually no churning out of SIPs and the SIP phenomena as you have rightly indicated is very much now a strong foundation of the market. I don’t anticipate that to change. I also think the shift in our pension philosophy, pension investing is another very major pillar in the domestic market that was not there in 2015. Thanks to both Employees’ Provident Fund Organisation (EPFO) and National Pension Scheme (NPS) growing, we see another very strong pillar emerging in our markets.

Market may revisit 7700 mark; focus on large caps: Motilal Oswal

India currently is been singled out by investors because of the outflows seen in recent time, believes Rajat Rajgarhia, MD – Institutional Equities at Motilal Oswal Securities.

There is an imminent fear in the market on the back of a slowdown in corporate earnings and economic growth. Market could revisit the 7700 levels, he said.

However, Rajgarhia believes that demonetisation will bring informal industries into the formal system and financial system, too, is expected to become stronger.

Market with a cash component will suffer. Some companies – like HDFC   , Infosys   and L&T – always come through issues, he said adding that they could be used to hide in the current situation.

Focus should be on large caps than midcap or small cap stocks for now. Markets have more fear about FY18 earnings than FY17 numbers, Rajgarhia said.

Sonia: It is just bad news galore in this market. First it was demonetisation; we had a whole host of global cues to reckon with and now the latest news flow about how foreign portfolio investments (FPIs) could be taxed. What is the sense you are getting about the direction? Do you think the market direction will continue to be on the downside at least up until the Budget?

A: Right now India is just being singled out by investors in terms of significant outflows that we have seen. Just in this quarter till now we have seen net USD 4 billion of selling just in the equities, bringing down the total year inflows to just about close to USD 3 billion. That is very low and the market is kind of reflecting that.

We are into a fearful environment where even if news may not be true to an extent, the damage that that noise creates is significant. But the core of this entire fall is the near term pain or the near term slowdown that we are seeing in the economy, in the corporate earnings which the market is just trying to adjust to right now. Whether that near term is one quarter, two quarter or three quarter that is what market will try to figure out but right now that fearful environment is what is knocking down the market and the stocks down.

Latha: Your note has one very interesting line – demonetisation is an unprecedented reform undertaken. This is going to have a bearing on the investment frameworks in the near term and could drive several changes in portfolios – could you flesh that out what would be included, what would be excluded because of what you say a change in investment framework?

A: This whole concept of bringing a significant part of the informal economy into the formal mode is going to create a lot of changes. Second, we are going to see the formal financial system getting far stronger than what it has been into the sector. Third, there always has been significant amount of purchases or even in the high ticket consumption where cash component has always been pretty significant. We are basically trying to articulate that many habits in this country will undergo a change if this trend were to persist and because of those changed habits investment portfolios or investment frameworks will also change. So, that is what this note essentially refers to.

Latha: If you could just elaborate that therefore in terms of listed stocks? As you get the informal sector into the formal sector it is quite possible that some elements of the informal sector will die away because they are not used to paying taxes and that will eat up their margin. Therefore will somebody in the formal sector benefit, after all informal sector is not listed. So, who will be the beneficiaries in the formal sector?

A: In the formal sector first of all the banks which are very well updated on the digital framework, they will be able to take a part of the large wallet share spending which is going to come into the system. Second, if you just look at the amount of money which was lying at the average household they are well moving back into the banks in form of Current Account, Savings Account (CASA) they stand to gain out of it.

Third, some of the non-banking financial company (NBFC) where their expertise has traditionally been to assess a non taxpaying individual in terms of giving loan. Some of them will have to reorient their business models just to combat – if the formal system of lending is going to gain a larger ticket share then how do they cope up with it. Real estate, while it is a consensus that whichever market in real estate have a cash component of business that market is going to face challenges and then as the government keeps unveiling more and more measures as a follow-up to what they have announced on November 8, we will see more clarity on which sectors investors would like to focus on.

Sonia: Do you see this market revisiting the earlier Budget lows of around 6,900-7,000 because of this issue?

A: If you just assess that the market on a marketcap to gross domestic product (GDP) ratio goes back to the lows that we made in February 2016 then even at a 10 percent higher Nifty level the marketcap to GDP will go back to those lows because while absolute levels do matter in the mind of investors, whenever you talk of new lows one should look at the valuations. So, the 7,000 of February 2016 will be equivalent to the 7,600-7,700 of February 2017 just because of the sheer nominal GDP growth of close to 9-10 percent. So, we are not too far away from that. Whether the additional fear or more selling can take markets even below that then yes, in the near term anything is possible.

Frankly, I was surprised when the market touched 7,000 in the February 2016 also, but do remember a lot of global environment was also unsupportive then. Today globally a lot of markets are at their highs and India is still underperforming.

Latha: So, where do you go for refuge? At a time when you say that 7,600, which will be equivalent to 6,900 of February 2016 is possible in the very least, where do you hide?

A: First of all whenever you have times like this people typically tend to focus more on largecaps and midcaps as you were just mentioning earlier that the selling intensity in midcaps can take stock prices much lower. But more importantly there are companies which have always come out better. If you look at names like HDFC, Infosys, Larsen and Toubro (L&T), in all these cases we probably will be talking about whether the growth is 5-10 percent and not 15 percent, unlike spaces where you can talk about whether the growth will be minus 10 percent versus plus 10 percent.

Sonia: What about some of these sectors that have seen the biggest brunt of demonetisation, sectors like commercial vehicles (CV), cement, other auto companies is the worst already in the price and are there any stocks that look attractive now?

A: They are cyclical. So, they will always tend to overreact. Till about six months back cement was the most consensus trade. Largecaps at USD 230-250, midcaps at USD 100-125; at least that valuation froth is over into these names now.

Some of them are probably getting into a buy zone from a price point of view but from a time point of view maybe you would like to wait till sometime in February, see through the Budget and you maybe more comfortable buying them 5-7 percent higher but maybe into a more certain environment and also you don’t know that 5-7 percent higher is from the today’s price or from a price that they fall further in the run up to the Budget.

Not fair to say mkt isn’t paying taxes; STT is painless: Damani

Speaking to Ramesh Damani, Member of BSE said that they do pay their share of taxes in the form Securities Transaction Tax. “Everytime we buy a share, whether we sell it a loss or profit, we pay a tax,” he said, adding that the government makes Rs 7000 crore by way of this tax on a dull year. Commenting on how it is painless, and fair the tax is, he said it is not fair to say the stock market isn’t paying its fair amount of taxes.

To assuage market fears, Finance Minister Arun Jaitley on Sunday said there is no move to impose long-term capital gains tax on share transactions, an issue investors are hugely touchy about. The statement came a day after Prime Minister Narendra Modi reportedly dropped a hint on increasing taxes on capital markets and the need for all sections, including market players, to contribute to the national exchequer.

If the government tinkers with long-term capital gains, it is bad public policy to keep changing it. Second, a lot of people who benefit from it are promoters who hold the shares for a long period, and they will be hit, he said.

He emphasised that the STT is a more equitable method to collect taxes.

Let’s abolish the STT if the long-term capital gains are the way to go, he said.

It is a low-volume downtrend in markets and it might continue into new year, he said. But he is not bearish, and these things happen in the market.

Speaking to Dinesh Kanabar, CEO of Dhruva Advisors, said that there has been an assurance from the FM that there will be a commitment that will move to a reduced rate of taxes.

He believes that that government won’t increase the STT as it is across the board. “I am seeing a rationalisation of taxes in the Budget.”

He also spoke about the GST rollout saying that he sees a continuing bridge between Centre and states. I commend the FM for everything he has done for keeping the dialogue going.

He expects a reduction in corporate taxes as most of the concessions are going away from this year.

Rahul Garg, Leader, Direct Tax, PWC India also said that apart from Mauritius, there are other jurisdictions that provide tax benefits for investments to india. Foreign investors might have to pay tax on investments in unlisted entities, he said.

Latha: What do you make, the Prime Minister (PM) cannot be taken lightly, can he and he says those who benefit from markets must contribute more to the exchequer?

Damani: There is a nuance delivery. Obviously Dalal Street has dodged a bullet in that sense because what the Prime Minister said, the very clear interpretation that the market would have come to is that they are thinking seriously about reintroducing long-term capital gains. Then Finance Minister Arun Jaitley came and said that it is not the intent of the government to do that and that has given Dalal Street a sigh of relief.

As you have been mentioning in your early morning preamble, there is a chance that say long term capital gains would go from one year to three years or the dividend rates will be tinkered with; I think the point that the general public needs to understand from the Dalal Street point of view, is while we do have long-term capital gains at zero, we do pay our share of taxes in terms of the Securities Transaction Tax (STT) tax. It is paid whether we make money or not. Every time we buy a share, whether we sell at a profit, sell at loss, or at a draw — win, lose, or draw — we pay a share of STT. The government collects Rs 7,000 crore odd on it on a dull year; in a year that is boiled with volumes would be more like Rs 10,000-12,000 crore.

It is a very painless, very efficient and a very fair tax which is introduced to all players, not only domestic players or retail players, or institutional players, all of whom were previously exempt from long-term capital gains, so, it is a very fair tax, very efficient tax, it has led to buoyancy in tax collection from the stock market. Dividends are now taxed on a triple measure. They are taxed on full corporate earnings, they are taxed at the hand of the retail investor and there is also dividend distribution tax. So, it is not quite fair to say that the stock market has not been paying its fair share of taxes.

Sonia: You did mention that there could be some tinkering of taxes that could be done in this Budget. There are talks that there could be an increase in the minimum holding period for listed securities or perhaps a change in the tax rate for short-term capital gains as well. If that does come about, do you think that it could just mean a very short-term pain and seamless for the longer-term or do you think that the market could sort of get jittery because of that?

Damani: Two things, first let us say that they tinker with the long-term capital gains, they move it from one year to three years. First, it is bad public policy to keep changing these things because the market needs to know when they play in capital allocation what the tax rates are going to be.

Secondly, a lot of the people who benefit from this are promoters who tend to hold stocks for 20 years, 25 years before the next generation re-jiggles portfolios into their name. So, it is not going to be very tax inducive per se for the government to introduce to change the holding period from say one year to three years.

Now, you are talking about short term rates; we can’t pay both. We can’t pay a corporate tax rate of 30 percent and STT; that would be double taxation. So, the government in its wisdom can decided whether it wants to track short-term gains or it wants to collect through STT. Any serious study would say that STT is a far more efficient, far fairer method and a far equitable method to collect taxes.

So, it is my belief that after study, they will say that let us continue with the STT rates and the short term rates rather than tinkering with them again. Having said that, I think this Budget will go to see a lot changes in direct tax rate as opposed to indirect tax rates because that is all waiting now for the goods and services tax (GST) clock to tick. So, there will inevitably be some tinkering. I just hope it is within the realms of reasonability.

Latha: On the one hand let us compare the weightiness of the Prime Minister vis-à-vis the Finance Minister in the cabinet. The second point is all the taxes you rattled of, my sense is the PM was aware of it when he spoke on Saturday. Given that how would a person with long positions in the market today react?

Damani: There will be some nervousness, no question about that but the individual policy matters, I hope they will take full cognizance of the fact; if for example we do get a long-term capital gains rate tax, I have no problem with long-term capital gains. a lot people in the market feel that is okay but you can’t put STT on that, dividend distribution tax and all those various other taxes that you put into the equity market.

The government wants to sell the PSU shares, the government wants to raise money through capital market, you make the capital markets effective particularly in the west when for example Trump is saying I am going to reduce the corporate tax, I am going to reduce the long-term capital gains rate, money is a global commodity and moves where it is most wanted. So, I don’t think you want to make it inhospitable in India after being so hospitable in India. So, I think better sense will prevail. The government can decide that it feels that long-term capital gains is a better way to go then let us abolish the STT, let us make sure we do that.

I would seriously request the government not to impose an additional tax on the STT. The STT is imposed no matter what happens. If we make money, it is taxed — the minute we buy a share or security, we pay STT on that. So, everyone is contributing, it is like someone depositing a salary cheque or a profit and being taxed on that. So, it is a pretty onerous tax and market has learned to live with it. I hope that we don’t get into this rob Peter to pay Paul type of economic philosophy.

Latha: How would you interpret what the FM said and the PM said? Should we brace ourselves for some taxes?

Kanabar: I happen to be sitting in the audience when Prime Minister was speaking and sort of kind of expected the kneejerk reaction that I saw. Essentially, he made three simple points; the first point, which he made was that the markets were supposed to be looking at cash segment whereas it was derivatives which is now driving the whole market and as he said it was like tail-wagging the dog and I haven’t seen too many people write about it at all that was number one.

The second point, which he made was that there was an effort to try and plug loopholes in the tax. It is very unusual to hear our Prime Minister talk about the fact that India has re-negotiated tax treaties and he spoke about it as to how India had negotiated tax treaties and plugged all the loopholes.

The final point, which he made was to say that there are people who are participating in the market making money out of it. Are they paying their fair share of taxes? Is that the way the markets should be where it does not give fair share of taxes and that of course has now been interpreted and reinterpreted and then clarified by the Finance Minister.

So, I am not surprised that the entire dialogues began on whether or not long-term capital gains will be reintroduced. However, probably he was making a much broader and a macro statement than just a statement on taxation of long-term capital gains.

Sonia: Do you think that even if we don’t get the long-term capital gains tax as the market is fearing there could be some changes in the tax rules this time around in the Budget. If yes from an equity stand point what could those changes be?

Kanabar: I heard a couple of minutes earlier Latha speak to Ramesh Damani and ask him about whether the reduction in the rates of tax could be rolled back. I don’t think that it will be rolled back. I think there has been a categorical assurance which has been given by the Finance Minister on the floor of parliament and from whatever I hear I think there is a definite commitment to say that we need to move towards a reduced rate of taxes.

There is just this whole thing that can we evolve a two-tier structure where at your choice either you end up paying a reduced rate of tax at 25 percent or you go on to the normal tax regime and you pay higher rate of tax but you are permitted deductions, carry forward of losses etc. There is one such provision, which exists in the income tax act and the thought process is should we have that across board. That is something which we will see in times to come.

There has also been this speculation that does this mean increase in the securities transaction tax (STT) and hopefully no, I don’t think the government thinking is that they want to increase the STT because it is a tax across board and therefore it is even the very small investors.

So, what I am seeing in the forth coming Budget is a bit of rationalisation of taxes. Remember that the government has constituted a committee under the chairmanship of Justice Eshwar. The recommendations of that committee are expected over the next couple of days and those recommendations will weigh in very heavily as the Finance Ministers goes to present his Budget this year.

Latha: I didn’t mean to say that he will rollback. I said is a tax cut ruled out? There was an expectation in that entire corporate tax structure itself will be brought down a bit. That apart how are you interpreting what the PM said? I take your point he did not refer to anything as narrow as capital gains he just said that those who make money should contribute more. If you only take that, what will you expect from the Budget?

Kanabar: There has been this one whole dialogue on how does one — so on the one hand for example and I am reading this particular sentence in the context of the preceding sentence that he said, which was regarding how loopholes in that tax treaty were plucked. So, there has been for example this pushback, which many of the FIIs have been making and may be legitimately as I would say to say that once as you are aware there is this whole controversy that Mauritius has grandfathered the investments which have already been made pre March 31st.

However, the question which has arisen is that come General anti-avoidance rule (GAAR) and come the Base Erosion and Profit Shifting (BEPS) recommendation would it be really that the grandfathering will go away. From the way I would read the Prime Minister’s statement is to say that he will be very less inclined to permit people to do treaty shopping and find ways and means out of it.

There has been this other request, which has been made by FIIs for example that if they satisfy the limitation of benefit clause in a tax treaty then GAAR ought not to apply to them, threshold under GAAR been significantly higher than under limitation of benefit.

There has been a huge push back and in fact there has been fears that if this doesn’t people will sort of stop investing into day trade and whatever else. I see less inclination on the part of the government to agree to such propositions. So, that is the way I see it as opposed to going back and saying an imposition of a specific tax.

Surabhi: We never thought it could be so much of taxing times as we get into the holiday season but what have you made of the commentary that came in over the weekend, the clarification that the Finance Minister made and more importantly the Central Board of Direct Taxes (CBDT) circular that is talking about taxation of investors into India dedicated funds, the indirect transfer provision that one is referring to. How serious is all of this?

Garg: First, let me deal with the India dedicated fund and the indirect transfer issue – that is something which market has already factored because the indirect transfer is the law which is already there and the circular only clarifies the situations which were understood by and large by people and therefore I don’t think that is a serious in terms of how people would look it changing anything that was there already.

In relation to the capital gain on long-term is an important issue and as you know that in the economic indicators the stock market indicator is one which is doing fairly well and the others maybe trailing comparatively. Therefore, to my mind any step by the government to take an action in relation to the equity taxation particularly on listed equity which might impact the market may not be a great idea at this point of time.

However, I also think that the clarification subsequent given by Finance Minister saying that we are not looking at taxing capital gain is hopefully the likely situation. But don’t forget that the capital gains tax today, we all say is exempt from the securities in the stock exchange but everybody pays minimum alternate tax (MAT) on that. So to that extent it is not something which completely escapes taxation. People earning capital gain do participate in nation building by paying MAT on that as per the current regime. So, I am very hopeful that it should not change.

Nigel: Let us try to understand this point then. There is a school of thought that says maybe long term capital gains will come in, but then they will scrap Securities Transactions Tax (STT), they will scrap the cess etc. How do you weigh both these two factors, will that offset each other, give us some numbers, do you think it makes sense?

Garg: I would not have numbers readily with me but one thing I can say for sure that taxing and administering the capital gain on individual investor is much more difficult than administering the transaction based tax like STT, particularly in the new IT world. So, I would assume that in wider net of tax if you stay on the transaction based taxes that may be to some extent presumptive but is easier to administer and leakage is much less there.

Nigel: So, you don’t think that is a good idea then?

Garg: I don’t think it is a good idea to impose the taxes and tracing back the investors and we have only limited ways to trace them.


Earnings growth of ex-financials may come down to 0% in Q3 & Q4

Many sectors have been engulfed in the aftermath of the demonetisation drive and the market too is bearing the brunt of the cash chaos.

Expressing disappointment due to the cash ban Anish Damania of IDFC Securities says that the market may not see a recovery soon and there will be three quarters of dismay.

Speaking to CNBC-TV18, he said that the earnings growth will be impacted and earnings growth of non-financial sector can come down close to zero percent from 15 percent.

Painting a positive picture, he said that the earnings growth will be positive for the finacial sector. Banks have received deposits at lower rate of interest and earnings will be more positive than negative for PSU banks.

Damania says he finds value in the pharma sector, IT, oil and gas, commodities.

He also bets on Sun Pharma and says it is a matter of time that the negative news will die down.

There will not be too much of an impact on Sun Pharma    and 18-19 percent earnings growth can continue, he said.

Asian Paints   still continue to be expensive and Damania takes a hold call on the stock.

Sonia: The mood is quite sombre. The Nifty has lost 10 percent in the last three months. Do you get a sense that we could see lower levels in the market very soon?

A: It goes like this that the earnings trajectory definitely which was so far, till September quarter, ex-financials, we could have seen a 15 percent kind of growth. There is a huge suspicion on how that is going to pan out in this quarter. We have not been able to work out the numbers as yet because the situation is so fluid and even corporates are finding it extremely difficult to guide as to how things are going to be. So, clearly, there are going to be disappointment this quarter, next quarter, probably one more quarter after that. So, there could be three quarters of disappointments and if that is how the situation could be, I would not be betting on a recovery in the market. However, domestic flows continue to be there.

So, till the time domestic flows continue to be there, there will be brake supplied on the fall in the Nifty. And this is exactly what has happened, so post demonetisation we saw the market go below 8,000. It has recovered a bit and now again it is below 8,000. So, to an extent, we have seen that there was this initial impact of demonetisation, there was a small recovery and again it has come back. So, it will take some time for markets to find its place and till that time, it will remain weak. In my view, it will remain a little bit more range bound till about January 15. After that, we will see how data comes along and we will take a call on the market at that point of time.

Latha: What have you done to your earnings? How much have you tweaked them?

A: Right now, we have just put it on hold in terms of, we are getting data company-wise and most probably by the end of this month, we should be ready with our numbers. My sense is that the earnings growth, which we have seen so far, ex-financials, let us say keep the financials out, of 15 percent in Q2, that can come down to close to zero percent. So, that is something which we will have to look at. So, there could be downgrades of anywhere between 5 percent and 15 percent in terms of earnings of the companies.

Sonia: So, you said that the earnings growth of 15 percent can come down to zero percent. This is ex-financials. But by when? Will it be in Q3 and Q4 or do you think it could be over the next six months?

A: In Q3 and Q4.

Sonia: But what about financials itself? Are you seeing any kind of upside there? Because over there, we are seeing the problems just exacerbate, especially for some of these public sector undertaking (PSU) banks. Any thoughts on how to approach it?

A: Initially, it will be a positive thing because the deposits, which they have got is at a lower rate of interest while the money which they are depositing with the RBI is coming with about 5.75 percent or so. So, there is clearly a spread. So, I would say that to that extent, the earnings will be okay as far as PSU banks are concerned.

What we need to look at is how the economy shapes up and a lot of these PSU banks are exposed to small and medium enterprise (SME) and micro, small and medium enterprise (MSME) and how those perform over a period of time. So, that is something which we will have to watch. However, in the initial phases, earnings will be more positive than negative for the PSU banks.

Latha: What about consumer discretionary? Yesterday, we had the India Business Leader Awards jury round, and one of the things that came from that jury was that high level, luxury consumption could get hit rather badly even if staples and other things start picking up. Are you changing your view on any of the consumer discretionary? Buys and sells?

A: We had already changed our view. We had sell calls on staples prior to demonetisation. That we have removed from our top-sell list and we had buy calls on the consumer discretionary that we have either put onto hold or underweight. So, that is exactly what we have done. We will wait and see as to how much impact because there is clearly an impact. One is how much impact and how long will that impact last. That time will tell. According to our estimates or our talk with managements, we have found that there are varying degrees. However, most of them say that it will be at least six months before we can start seeing some normalcy.

Latha: Let me put this question to you in this fashion. After adjusting for the demonetisation impact, what are your list of buys? We also have decent value now compared to what the values were four months back. So, where are you finding value? What is your buy list?

A: Our buy list is clearly more relative in nature because we are finding out companies, which are not impacted by demonetisation. So, it is not very unknown that those companies stand in the pharmaceutical space, those companies stand in the IT space, the oil and gas space, the material space, I am talking about commodities, or those that find in business to business (B2B) businesses. Wherever the India presence is lower and international presence is higher, those are the businesses, which we are going into. And lastly, those businesses where we do not face the end consumer and they are B2B, like for example, the power companies like Power Grid , NTPC   , etc. or those have annuity kind of earnings like Bharti Infratel   , those kind of stocks are something which we would prefer at this point of time.

Sonia: But it is interesting that from the pharmaceutical space, Sun Pharmaceuticals is the biggest loser in the month of December. It is down almost about 15 percent because of its own issues with respect to the Halol plant delay and US Food and Drug Administration (FDA), etc. Is this a good time to be buying some of these heavyweights like Sun Pharma? Do you think the US FDA issues will continue to plague them?

A: Absolutely. This was the story when the pharmaceutical companies were derated and we were underweight pharma till the demonetisation happened, because it was continuing to plague them. You can see Sun Pharma has already come off from its highs of about Rs 1,300 to less than half that level. Businesses otherwise are fairly strong. I feel that at this point of time, it is now a good time to enter Sun Pharma. The risk reward ratio in case of Sun Pharma is extremely good. So, I would recommend investors to accumulate Sun Pharma through the negative news that might come through. It is just a matter of time before that negative news dies down maybe in the next 2-3 months. Then, probably we will start seeing stability and probably the earnings growth. I do not see too much of an impact on earnings growth and Sun Pharma, the 18-19 percent earnings growth can continue. So, once investors see that, they will switch back to pharma or to Sun Pharma with a big bang. And I would say that the right time to accumulate is probably when not many people would want to look at it.

Latha: What kind of lows can you see? There are some positives. We could expect something in the Budget or at least the market expects something will come in the Budget. It is possible that goods and services (GST) will be done in the budget session itself. Because of all this, is the bottom likely to be tempered?

A: One of the things, which I am looking at is what is the kind of expectations, which is building up. So, if you ask across the spectrum, then there is expectations of a big bang Budget. So, most people are expecting that taxes will be cut for both the corporates as well as the individuals. You will have a last stimulus to the poor sections of the society and therefore spending can improve.

Then we have this talk that GST could be through the Budget and all those things. So, if you look at the expectations of people have increased manifold in this Budget. Now, therefore, to that extent, you will see that till the Budget time, the stock market may not fall too much. It will trade between the range of 7,800 and 8,200.

Therefore Budget, we will see what direction it gives and how they propose to go forward. That is something which will be very evident. My sense is that given the kind of pain, which people have gone through in this demonetisation process, it will be a large stimulus to those kind of people who have gone through this pain, especially because Uttar Pradesh elections and Punjab elections are coming up with other elections in the states of Goa, etc.

So, I would say that the government could be very well aware that if they do not give some largesse to the poor in the Budget, then they could lose the plot. So, I would expect the Budget will tilt more towards the kind of ‘Gareebo ka Budget’ than anything significant at this point of time.

Latha: GST, will that be a very big boost? Will you buy any stocks related to GST or would you not buy because of the confusion it will create?

A: My sense is that GST is an issue which needs to be resolved and if I were to go back a little bit, about 15-20 days when some of the people of the GST council say that April 1 deadline is unlikely to be met. Now let us see how that progresses because it seems to me that the government is extremely keen that this goes on a April 1 deadline. So, let us see how this meeting goes.

I am not so sure how much probability to put to the event of this contextual issue about dual control getting sorted out. Most likely it will take some more time before it gets sorted out.

The second thing is that because of this demonetisation, a lot of states would have lost revenue for things, which are not covered by GST and I am not so sure as to how the states are going to bargain for those losses, which they feel could be inflicted by the centre’s move on demonetisation. So, there will be this tussle, which will go on for some time. I am sure because GST has to get rolled out before September 15 of next year that it has to get resolved pretty soon now over the next two months or so. So, I am sure that that resolution will come through but at what cost to the centre is something which we need to see.

First of all, GST, in the wake of what has happened with demonetisation will be some more disruption and we also need to see how the rules come about for the stock, which is there at the start of the GST cycle as to how that will be treated with respect to the taxes, which were applied earlier. So, there are these things, which need to be sorted out, which we need to understand before commenting on that.

Sonia: Asian Paints has lost more than 10 percent this month. Is this a time to be buying some of these franchises or would you wait some more?

A: I would wait some more time because at the dealership level, right now because paint jobs could have been in process so, they may not have stopped half way. So we just need to see. It might be a little bit, a moth or a two month lag impact, which will see the demand fall happen. So, I would wait. Asian Paints is still very expensive. I think it is not fully accounting for probably a slowdown. At the same time, oil prices have also risen. So, the cost of raw materials also would have gone up. So, we would like to wait for some more correction in the stock price before we buy that business right now.

India growth story intact; 3 Fed hikes unlikely: Citi

Willem H Buiter, Global Chief Economist, Citi is of the belief that the demonetisation process in India will only have a minor impact on growth and will not alter the underlying India growth story.

Demonetisation could be just a small currency pimple on growth, he said. It should have been an act of surprise but only when new cash was ready.

Sharing his view on global growth and US economy, he said although global growth could be a bit stronger in 2017, there are risks to the downside. Meanwhile, emerging markets would perform slightly better than advanced economies in 2017, said Buiter.

With regards to the US dollar, he said if fiscal stimulus as promised by Donald Trump goes through the Congress then it would push the dollar higher.

Moreover, he does not think US Federal Reserve will go through three hikes as proposed. More rates will be seen in 2018 than 2017, he said.

Latha: Let me start with the global economy first, at Citi, what is the opinion, do you think 2017 will be a better year for the global economy than 2016?

A: I think on balance the central projection is indeed for a slightly stronger global growth than in 2016, nothing major but yes most emerging markets (Ems) somewhat stronger and advanced economies on average roughly at the 2016 level. The risks however are mostly on the downside.

Latha: How would you rate the US economy then? Do you think US economy would do better than it did in 2016?

A: We should have somewhat faster growth. Close to the 2 percent that we got in 2016 but this is of course contingent on new President-Elect Trump passing his reforms, his derogatory reforms and getting seriously on his fiscal stimulus and avoiding falling into trade woes. Those are the three conditions and certainly the regulatory reforms are quite likely. The timing and size of the fiscal stimulus are highly uncertain, unlikely to see anything — it could come out of the pipeline in terms of tax cuts or spending increases until 2018. So the markets may be getting slightly ahead of themselves instead of the joy of fiscal stimulus.

Sonia: What is your bet now on Trump’s policy tilt, is he likely to be protectionist or do you think that going ahead he could be more inclusive in his policies?

A: It is certainly not ideologically worded to globalisation. He believes that the kind of reasonably free trade arrangements and free FDI that US has supported since World War II have ended up hurting the Americans and so he is likely to be more protectionist both as regards trade and as regards foreign direct investment. I don’t expect major transformation, the kind of 45 percent tariffs slapped on Chinese imports, I don’t think we will see because it will be such an obviously mutually destructive act.

Sonia: What about the dollar, the strength of the dollar has been the story of 2016, do you get a sense that we could have further gains in the dollar even in the early part of 2017?

A: If we do indeed get clear signals that the kind of fiscal stimulus that the market is anticipating, will get through the US Congress then we would see continued dollar strengthening because the fiscal stimulus would run into Fed increasing  the short end. So the whole yield curve would not just stiffen but would shift up and that would be a first for many years in the US and it would definitely support continuous strengthening of the dollar, which would discomfort financially fragile emerging markets.

Latha: The other story that was prevalent in 2016 was the strength of crude and of commodities, even metals, do you think commodities have the strength to run in 2017 as well?

A: If we have global growth at 0.2-0.3 percent higher than last year and if especially China continues to deliver the kind of fiscal stimulus focused on infrastructure maybe residential construction that we have seen this last year then commodities could have further to run.

Of course always commodity specific stories that are more supply driven than demand driven and oil is one of them but there is no reason to assume that when the world economies expected to pick up a little, I think you would expect to see weakening of commodities across the board. So I think commodities probably are quite comfortable.

Latha: Where does that leave the Fed then? If commodities are going to create inflation, the promised three Fed rate hikes will come?

A: I personally find it hard to believe that there will be more rate hikes in 2017 than the Federal Open Market Committee (FOMC) expected in September. They have gone from two to three. We expect that with the dollar strengthening, with long rates strengthening and the fiscal stimulus not yet coming out of the woodwork and with the disinflationary effect of a positive supply shock to regulation, I would say there would be downward pressure on headline inflation. So, I do not see it in 2017. I see more increase in 2018. But the stimulus would have to be brought into 2017 to see three rate hikes.

Sonia: Have bond yields reached the highs that they can reach? Is there a further climb in store for 2017 you think?

A: If we do not get these three increases that the Fed promises and if the fiscal stimulus I expect is going to be backcast into 2018 then the current level of the long yield may seem somewhat over the top in the US, that is. As our stock valuations that have anticipated a big boom that is unlikely to materialise in 2017, so markets as usual have got the bit between their teeth and are running too fast. But qualitatively, they are right, but quantitatively they are overdone.

Latha: Let me come to India. Your student is the governor of the Reserve Bank. Dr Patel has been your student, you have co-authored so many papers. What do you make of this massive demonetisation or currency change that India has undertaken?

A: Two things were confused by whoever initiated the currency exchange. One is going after the black market, tax evasion, the underground economy by having the currency reform. The Netherlands — my own home country — did it after World War II to catch black marketers. You do it immediately, unexpectedly, but you have to have all the new cash, the large denominations ready. That is one.

Second, you want to basically get rid of cash and move to an e-money economy. There you give years’ notice and say two years from now, we are going to eliminate the Rs 1,000 notes, three years the Rs 500, etc. And somehow, they got the two mixed up. So, they did it immediately and unexpectedly, but it did not have the new cash ready. So, that was a bit of a mess, but in principle, this way of going after the black economy can be very effective. It just means you have to have the new cash ready rather than have people hope and wait for it and panic.

Sonia: But the fear is that this has soured the India growth story and the expectation of growth going ahead. How would you react to that and will 2017 be a better growth year for India?

A: This currency kerfuffle will have a minor impact, but nothing significant. It does not alter the underlying story that India is going to probably have the fastest growth rate of any globally significant economy for 2017 and the years beyond. This is just a small currency pimple on an otherwise very smooth and pretty good growth performance.

Latha: That is good to hear ahead of Christmas. Finally, how will smart money move? We have been seeing selling of emerging markets, that is short emerging markets, long developed markets trade for a better part of 2016, does that continue in 2017?

A: No, I do not think so. We are going to see more of that especially if, as I expect, the incoming Trump administration will make clear its determination to get some fiscal stimulus through. There will continue to be upward pressure on the dollar and the much more attractive rate configuration, short and long in the US will mean that money will flow out of emerging markets and financially fragile EMs with large current account deficits, large stocks of foreign debt, poorly managed and/or with a peg or managed to change vis-à-vis the dollar, will be the most vulnerable. So, you should expect to see continued withdrawal but not a rout for the reasonably performing emerging market. This is very much a fragile emerging market story.

SBI will kick off process in FY18 to list its insurance arm

State Bank of India   (SBI) will begin the process of listing its insurance arm SBI Life in 2017-18.

SBI Life was valued at Rs 46,000 crore during a recent stake sale in December when the State Bank of India (SBI) announced it would divest 3.9 percent stake in its insurance arm for Rs 1794 crore. This made the insurer the highest valued life insurer.

In an interview with Moneycontrol Arijit Basu, MD and CEO, SBI Life said that now that they have a benchmark, this will be actively considered in the next fiscal year.

Sources said that the process could be completed in 18 months.

SBI Life is a joint venture between State Bank of India (SBI) and BNP Cardif with the latter holding 26 percent stake. The foreign partner BNP Cardif will take a final decision to hike their stake by the end of the financial year. The new insurance laws allow foreign partners to hold up to 49 percent in an Indian insurance company.

Basu said that the valuation came because of the strength that the investors saw in the company, not just in the new business, but also in the quality of business. “Our responsibility now is to see that this is maintained and this will happen if we grow at a reasonable pace in the months and years to come and also maintain the qualitative metrics,” he said.

With respect to the listing, Basu, however, said that no final decision has been taken and that it will depend on market conditions and the timing. Currently, only one insurer ICICI Prudential Life Insurance was listed on the stock exchanges.

Apart from this, the insurer is also working on becoming the largest insurance company in terms of valuation. Basu said that their growth rates have been much higher than their competitors.

The combined valuation of HDFC Life-Max Life once they are merged could be higher than SBI Life. Basu said that they aspire to be bigger than them. Max Life has announced a merger with HDFC Life which is under consideration at the insurance regulator’s office.

Basu added that if they continued to keep growing, their growth rates would be significantly higher than our competitors. Even last year, he said that they grew at 38 percent while their competitors lagged at 10-11 percent.

In an earlier deal, while ICICI PruLife was valued at Rs 32,500 crore, during the initial public offering (IPO), it was valued at almost Rs 43,000 crore. HDFC Life-Max Life combined could be valued at Rs 65,000 crore, according to industry analysts. “

Till November, growth has been significant. If you add up the numbers, we can aspire to be bigger than them [HDFC Life-Max Life]. We have presented the same to our board as well and hope to achieve it,” he said.

The insurance industry is also bracing for changes, not just from the upcoming Budget but also the Goods and Services Tax (GST) that is expected to be implemented from the next financial year. Basu said that they have sought tax sops for the life insurance industry. He added that since the need for life insurance is not very well understood, some incentives should be given to life insurance policies.

Digital theme key; build portfolio in next 3 months: Max Life

Speaking to CNBC-TV18 Mihir Vora, Director and Chief Investment Officer of Max Life Insurance said that the next three months would be a good time to start building a portfolio.

Two years ago, the top themes were infra spending and private spending. Going ahead, he believes urban and rural consumption story will continue to be key plays. Any setback from the demonetisation is temporary, he said.

He is also bullish on fintech and e-governance sectors. “Most opportunities are still in the digital space.”

Long-term stories include private banks, NBFCs and MFIs, along with general consumption. He sees even FMCG as a strong contender for a positive upcycle as it has corrected decently.

While he is bullish on cars, within two-wheelers, he will focus on niche segments. “We will pick and choose segments which are underpenetrated.”

There is still money to be made in bonds, he said, adding that he expects a couple of rate cuts in next year.

He expects markets to correct by 5 percent as a lot of global events like Donald Trump’s presidency, French elections will have a bearing on them.

He is not very keen on IT, as the sector has saturated. Pharma companies haven’t come out of shadow of its FDA issues.

Although FIIs are pulling out money, local flows are robust, he said. “Insurance companies and MFs continue to get money,” he said.

He expects the Budget to throw up positive news on rural housing.

Latha: How is life looking for equities in the first half of 2017? Will we still be reeling under the negative corporate results because of demonetisation?

A: I would not say we would be reeling because a lot of the reeling is already happening as we speak, so to say. But yes, not all the analysts and not all the investors have really cut earnings estimates aggressively so far, which should happen in the next three-four weeks as we go into the earnings season. And probably the next three months might be a good time to start looking at stocks which you missed out the last time around and wanted to buy in any case good quality stocks, structural growth stories that we wanted to buy, where now, they are pricing in a lot of negatives. So, I would say some more time to go, some more downside in the market over the next weeks, but next three months would be a good time to start building the portfolio.

Reema: There has clearly been a lot of dislocation in the markets globally as well as domestically. For 2017, could you give us the top-three themes, for instance, towards the end of the year e-governance companies, etc. have also emerged as a big theme. As we stand at the cusp of 2017, what will be the big-three themes to play?

A: As far as India is concerned, two years back we were of the opinion that infrastructure spending, especially led by government and private spending will be the key drivers but that has not happened to the extent that one expected it to happen. The other thing that had developed was strong rural and urban consumption which I think, will continue. So, the setback that we have seen over the last few weeks is temporary and urban and rural consumption should continue to be the theme that one should play. The emerging sectors like financial technology (fintech) and e-governance, etc. are good sectors to be in but my guess is most of the opportunities are still not listed. They are still in the digital space.

Reema: So urban and rural consumption is going to be the big play for 2017?

A: Absolutely.

Latha: You said that now is the time to pick up the long-term stories, the structural stories. What are these structural stories?

A: Pretty much the same as what we have seen over 2016 which is public sector banks for example, giving away market share to the private sector as well as to the non-banking finance company (NBFC) space including the microfinance space, etc.

Latha: So private sector, NBFC and especially microfinance NBFC would be your pick?

A: Absolutely. And of course, the general consumption stories especially on the discretionary side and now in this last couple of months even the fast moving consumer goods (FMCG) space, which we thought was quite expensive, has corrected decently. So, in the consumption space, many more opportunities are opening up compared to a couple of months back.

Reema: In the consumption space, how would you play it because there are the likes of Jubilant Foodworks   , etc. where the business model to some extent has been disrupted because of what has happened and the stocks have gotten derated. So, it is a very broad theme so if you could elaborate a little more?

A: In consumption we have typically been looking at the underpenetrated segments.

Reema: Which are the underpenetrated segments?

A: For example, vis-à-vis two-wheelers we have been more bullish on cars because the underpenetration in cars relatively is much higher than the two-wheeler segment. However, within the two-wheelers, we look at companies which have succeeded based on certain niche segments and have delivered consistent growth. So, broadly speaking, while consumption will remain a theme, we would then pick and choose the segments which are relatively still underpenetrated and have much more leeway to grow in terms of per capita consumption.

Reema: So car is one, any other segment in consumption?

A: I would say that the NBFC space is also linked to consumption whether it is in terms of durable financing, car financing, auto financing, loan against property, personal loans, etc. these are segments which are still underpenetrated. So, that can continue to grow for a while.

Latha: Is there money to be made in bonds in 2017?

A: Yes. Probably not as much as in 2016, but still there is some juice left. We do expect a couple of rate cuts in the next year which would leave some juice n the bond markets too.