Budget 2017’s Rs 72,500 Crore Divestment Target A Tough Ask, Says Anil Ahuja
Anil Ahuja is positive on financial stocks, pharma and infrastructure space in India.
Finance Minister Arun Jaitley delivered a ‘flexible’ budget with a clear intention to meet the 3.2 percent fiscal deficit target, said Anil Ahuja, CEO of IPEPlus Advisors. However, the Rs 72,500 crore divestment target is going to be difficult to meet, added Ahuja.
Speaking to BloombergQuint, Ahuja said he expects domestic flows to drive the Indian markets with financials, pharmaceuticals, and infrastructure stocks leading the rally.
Let’s start with your take on Budget 2017. Is the government’s disinvestment target realistic? And will the finance minister be able to maintain fiscal discipline?
Lets first start with the fiscal discipline part of it. I think the direction is very clear, fiscal discipline is very important and they have every intention of sticking to the path of fiscal prudence. I think they will find it difficult to meet the Rs 72,500 crore disinvestment target because it has never been done before.
I will be positively surprised if the government succeeds. Rs 40,000 crore figure is seen as stretched, so the Rs 72,500 crore number is a tough ask. But they have other levers to play with.
So I am not too terribly concerned with the disinvestment number because it usually comes into play only during the last 3-4 months of the year and by then a lot of things will change.
I think Budget 2017 is a little more flexible because no one knows when the Goods and Services Tax (GST) will be rolled out. Will it will come in July or September? So what will be the final indirect tax collection, what will be the sharing, there are too many moving parts at this point in the budget.
But direction-wise, it is a good Budget, with the desire to have a fiscal deficit of 3.2 percent or better and if push comes to shove, you can always sell something towards the end of the year to make up the number. I think they will achieve the 3.2 percent target but the disinvestment bit looks difficult.
The government has promised only Rs 10,000 crore to recapitalise public sector banks in FY18. Is that enough especially considering the bad loan crisis that banks are still grappling with?
Rs 10,000 crore is not sufficient. That is a statement of fact. The question is that it is not the only thing that is being considered. While the budget was silent, the economic survey spoke quite clearly about the creation of a bad bank. So it depends on how they play it and what exactly happens with the creation of a bad bank and what size of the ‘bad loans’ can get transferred.
Obviously it is very complicated since transfer to a bad bank means what gets transferred, at what price it gets transferred, what happens after it gets transferred, the policy on that is not even in the public domain. So it is very difficult to say what exactly it will be.
But I think the Rs 10,000 crore figure is just a marker, the real impact on the banking sector will actually come from the bad bank creation and I would expect that to happen pretty quickly. Whether it will be able to stem the flow of bad loans is difficult to predict.
What do you expect the RBI to do on February 8?
I would be surprised if we see a rate cut on February 8. I don’t think there is enough juice to cut the rate yet. Also I don’t think there is a crying need for that yet. That is my personal view but I don’t think there will be a rate cut this policy.
The Economic Affairs Secretary told Bloomberg that the low cost deposit surge triggered by demonetisation will help banks cut lending rates. Do you expect that to happen?
If you look at the credit growth in the country, other than the retail side, rest of it is pretty non-existent. The banks have garnered a substantial amount of deposits through this demonetisation drive. Now how are they going to use it?
I think they will have to cut rates just to remain competitive to be able to book those loans. Otherwise the money will keep flowing into government securities, which will give you an interest of 6.5 percent.
Now if you want more, you have to lend it to somebody else. To be able to do that you will have to cut rates just to attract the customer. So I think a cut in lending rates will happen.
While demonetisation is one side that has generated a lot of extra deposits in the banking system, the other side is that I don’t think there enough cases where you can lend that much money. So other than housing and a small amount of credit card advances, I do not see much credit offtake. Infact, even the retail credit growth is in the mid-teens level and not a very high number anymore.
What do you make of the government’s proposal to merge government owned oil and gas companies? Is it feasible or desirable?
See, the question here is that do they provide competitive behaviour or do they actually compete with each other. My take is that they don’t actually compete with each other but they act as two different branches of the same organisation. In that sense, don’t think there is a major downside in bringing them together. There might be better economies of scale, there might be better co-ordination in terms of having single points on all the financial aspects, managerial aspects and strategic aspects. They could also work much closer with the government in terms of what do they do direction-wise. So, I think there is no significant damage or harm but even if there is an upside or benefit, it is not substantial.
What about the corporate earnings recovery? Do you think the fears of demonetisation’s impact on earnings were overblown?
Earnings have been okay compared to what the street was expecting. I will be surprised if the final number for Nifty earnings this year is more than 7-8 percent year-on-year, which is not a large number. If you go back a year, the number for earnings growth this time was around 17-20 percent. As time passes, we keep revising the earnings estimates for the financial year 2016-17 and as we keep revising that number, it keeps coming down and as it keeps coming down, it comes more closer to the number which is the actual one. This year’s number is certainly less than 10, it could be around the 7 percent mark. I will be surprised if it is higher.
What about the impact of Donald Trump’s policies on Indian firms?
I have been saying this for a long time that Donald Trump is the easiest guy to read because he has been consistent in what he has been saying for the last 30 years. Even then he said the same things on the lines of jobs in America or ‘America First,’ without using those words but actually speaking that language. I don’t know how serious the impact will be since what he has said has not become law yet and its only when the final law gets created that we will figure out what the actual impact is.
I actually think some of it might be beneficial because what is clear to me is that he is looking to reduce costs of healthcare in the U.S., which means a pro-generic shift for the entire healthcare system. A pro-generic shift is actually positive for India.
It is not as if we have 1,00,000 H1-B people sitting there on the pharma side, we don’t. What we have is that we are marketing in the U.S. and we have the facilities here. I believe we have a huge cost advantage over big pharma companies there in terms of producing generics in the U.S. and transportation costs for pharma are negligible. In that sense pharma could benefit.
I.T. is a difficult one because it was any way on the cusp of a change given that the work that was being demanded by the U.S. has been changing from body shopping work to more sophisticated work and that change with the current H1-B visa noise that we are hearing might just accelerate it.
Will the Indian I.T. companies be able to send a large number of people at $1,30,000? The answer is no. Only people with specialised skills will be able to make the cut which also means that a lot of other incremental work will have to be done in India. This could generate incremental margins. Depending on how the I.T. companies respond to this, they might just turn this adversity into a positive.
Which sectors or stocks are you betting on in India, now that the budget is out of the way?
The single biggest beneficiary of what is happening currently is the financial sector which has always been a good proxy to play the Indian mass market and that holds true even now.
I would still bet on pharma. Anything to do with housing or infrastructure will get support because this budget did provide some impetus towards spending. I am not entirely convinced about the metals pack because where is the demand going to come from? I don’t see a big demand boost coming either globally or in India.
I don’t think there is much attractiveness in the telecom sector given the competitive intensity that Jio has brought into the market. The talk of Vodafone-Idea coming together is yet to play out. So in this case the consumer is the winner and not the companies and their profitabilities will remain challenging for some period of time.
You often said that the markets were overvalued in India. The markets have recently seen a substantial run-up from 7,900 levels to levels of 8,700. Do you think that the market is fairly valued or have they run-up too much, too soon?
I think they have run-up too soon over the last 30 days but they are not as expensive. Two years ago, the Nifty was 9,000 plus. So there has been a substantial time correction also. I saw a chart about 40 large-cap mutual funds. The average return over a two-year period was 2.5 percent annualised which essentially means that had you been a dollar investor, you would have lost money.
After the initial euphoria of the Modi win in 2014 where the market ran-up towards the 9,000 mark, the market has gone nowhere since then with a plus/minus 10 percent driven by global or local cues. So the markets have been largely range bound. If you look at company specific data, you find companies on the expensive side. I think what is driving the market this time around is the domestic money which is flowing into the mutual fund industry which is a big positive and I think that will continue. So even if there is foreign selling, I think it will get absorbed. I don’t see a big trigger for a downside at this point of time.