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RBI should move towards a lower rate regime: Mayuresh Joshi

08 Feb 17 | 12:00 AM

As transmission of the 175 bps rate cuts done by the RBI so far, is beginning to pick up steam, key data-points are expected to be on RBI's side, says Mayuresh Joshi, Fund Manager, Angel Broking in an interview with Pranati Deva. He also adds that benchmark indices can witness a growth of around 12% in the next 15-18 months. Edited excerpts

Do you believe this budget has created enough space for the RBI to move into a low interest rate regime domain?

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The government’s borrowing program seems be suggest that the RBI should have ample room to move on the liquidity front. With Inflation - especially core CPI inflation - expected to remain in the RBI’s projected trajectory, we expect the monitoring of other data-points like PMI growth, IIP as well as the moves of the Federal Reserve and the ECB will be critical in decision making. However, with transmission of the 175 bps rate cuts done by the RBI so far is beginning to pick up steam and key data-points are expected to be on their side. We expect to move towards a lower interest rate regime over the next 6-9 months.

What levels do you foresee for the benchmark indices in the short and long term?

If one presumes earnings growth of be around 12-14% for the coming fiscal, index earnings growth should be reasonable considering uptick in earnings, more so on a relatively low base. However, the Fed decision-making process data-points from US economy and Brexit/Euro trade negotiation process can keep global markets volatile. So in the short-term, volatility in the Indian equities markets may continue. Outcomes of assembly elections in the states of Punjab, Goa and Uttar Pradesh may also have a bearing on the trend of the market.

For the long-term, we remain bullish on Indian equities markets. We expect earnings growth of around 12%, and a similar growth in the benchmark can be witnessed in the next 15-18 months. The risk to the estimates include: slower-than-expected earnings recovery, outcomes of the state election against market expectations and global conditions turning adverse.

What do you think will be a good investment bet right now?

Keeping in mind the government focus, power sector seems to be poised for a reasonable earnings growth. Downstream Oil Refining & Marketing companies and Gas Distribution companies appear for strong earnings growth over the next 2-3 years. Auto/Auto Ancillaries seem relatively better placed. You can also select private sector as well as public sector banks. With focus on affordable housing, select Housing Finance Companies seem to have potential upside.

What are your takeaways from the Budget? Do you agree this is a positive, pro-growth budget?

The budget presented by the Finance Minister is a balanced one with focus on rural sector, affordable housing and infrastructure development. At the same time, the budget sticks to the fiscal prudence path while having realistic targets on the revenue collection and capital expenditure, which will bring stability in terms of sustainable core macro-economic growth in the time to come. Increased focus and allocations on infrastructure, housing and rural development, augur well with the core sector growth and macro-economic stability.

Do you think IT sector will continue to under-perform?

The IT sector faces many headwinds in terms of the impending the H1B Visa Bill, which proposes changes in the wage caps, client discretionary spending, transformation to newer digital avenues (such as artificial intelligence, automation, cloud computing), which need investments, effective utilisation of bench-strength and managing attrition and are affecting industries like BFSI, Lifestyle, Healthcare, Telecom etc.

However, tailwinds in the form of a depreciating currencies (though cross-currency impact has to be kept in mind), along with increased focus on the digital aspect of the business should bring in better business and manage human resources more effectively over the next few years. On the weighing scale, headwinds appear to be more dominant and an obvious reaction has been witnessed on the bourses. However, valuations of IT majors, on comparative basis, seem attractive at this point of time. So, IT sector may continue to languish unless clarity is achieved on the aforementioned aspects, but selective stocks appear attractive both on earnings as well as valuation parameters.

Are you happy with the steps taken for the banking sector in the budget? Do you think a recapitalisation of Rs 10,000 crore will be enough? Will you suggest buying banking stocks in the near-term? If yes which ones?

FM Jaitley has categorically stated that more capital can be infused if need be. But then one must understand that the various steps taken by the government and the Reserve bank of India (RBI) over the past few quarters have actually aided the financial system by cleaning legacy books, recognizing bad assets and optimizing costs. Though, the pain was seen in the banking sector balance sheets over the past few quarters as large part of recognition was initiated with write-offs of legacy assets, accelerated provisioning for stressed out assets etc., leading to elevated credit costs and lesser retained earnings. The credit growth was also muted in the last few quarters and the street largely believes that most of the pain should largely get over by the end of the fourth quarter of this fiscal.

As credit growth picks up in higher double digits by the first half of FY18 and as pain of stressed out sectors (Iron & Steel, Real Estate, Gems & Jewellery, SME/MSME working capital constraints) starts receding, improvement in earnings shall be visible. The government bringing in sectoral regulations, a cleaner & leaner banking system will augur well for financial inclusion and economic growth. So, I am optimistic about overall BFSI sector and the larger private sector banks, select large PSU banks and some smaller private sector banks are where I would remain bullish.

Also, how will the move to merge and create a massive oil behemoth affect the oil & gas stocks?

With global crude oil prices remaining soft in the last couple of years, substantial gains have been made on the downstream balance sheets with debt reduction and lesser working capital requirements. Though the large part of the delta has been captured with current low global crude oil prices and expectations of oil prices remaining in the range of $55-60 for the better part of this fiscal, it shall all boil down to core earnings recovery.

With no under-recoveries for upstream, downstream and midstream companies and the current subsidy sharing mechanism in place to favour these companies till oil stays in this range, earnings will hold key for the Oil & Gas space. Upstream are direct plays on net realizations and downstream are a play on improvement of marketing margins both on petrol as well as diesel front. So, how the government plans to create an oil behemoth would be interesting to see, but downstream companies still offer long-term value on a relative scale.

FM left the STT and LTCG for equities untouched, how do you think this will impact the markets in the long-run? Do you think it was the right move?

The reaction of keeping the STT and LTCG unchanged received a big thumbs-up by the markets and this was reflected by the massive rally we witnessed on the day of the budget. If you recall, mere mention of taxing portfolio earnings by the Prime Minister rattled the markets, which means the market is not comfortable with possibility of such taxation. While the Finance Minister had calmed the fears of such taxation, the market feared announcements on STT and LTCG. However, by not touching these in the budget, the Finance Minister has averted a major fall in the market.

The LTCG for immovable assets was tweaked in the budget. Will that cut into the gains of investors? Will you bet on realty stocks in the current scenario?

In my opinion, the announcements made on this aspect have been well received by the markets. Realty, in my opinion, still has a couple of quarters before some earnings recovery can be evident. However, oversupply, massive inventory, excessive leverage on the balance sheet for most players still act as overhang. Also, the spilt in terms of regions, companies operating out of the NCR region still have excess supply/pricing issues. Realty companies operating out of south are still feeling the brunt of lower demand, and those operating out of the West are doing well selectively.

With measures announced for affordable housing, select companies from this space can do well as they are clear beneficiaries of government decision, albeit with a longer investment time horizon. Few real estate companies having relatively better annuity income over the next 1-2 quarters can be looked at with the hope of REIT’s becoming a reality in the future, which can benefit these companies.

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