Heavy selling on the first two days of this Budget week has caused severe damage to Indian equity indices. The Nifty fell over 100 points yesterday, to drop significantly below the key level of 5,800, while the Sensex tanked over 300 points to a 3-month.
According to Saurabh Mukherjea, head of equities at Ambit Capital, the heavy sell-off in the market is due to a funding crunch in the local market and is not indicative of a negative Union Budget. “The fact that those sell-offs are associated with stocks where the promoter pledges are high corroborates my thinking that this sell-off is driven more by a specific funding crunch pressure in the local market rather than because of broader macro sentiment,” he said. He further added that concerns surrounding the Italian elections and the Eurozone crisis have only spooked foreign institutional investors (FIIs), causing them to withdraw from the market.
Speaking about the possible impact of the Budget, Mukherjea says that he expects Finance Minister P Chidambaram to announce a 10% hike in excise duty for cigarettes, a move which has already been factored in by the market. “Along with this, the move towards as valorem duty for cigarettes will be negative for ITC,” he said. He also expects changes in indirect taxes to significantly impact FMCG companies.
Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.
Q: We have all been talking about the prospect of a good Budget, but who would have bargained for a pre-Budget selloff which we have on our hands? Did you expect it?
A: I have to confess we did not. The reasons for this are also not quite linked to fundamentals. My reading is there is a funding crunch in the local market. It is leading to small and midcap operators having to throttle their positions back. It is leading to promoters who have got pledged shares having to repay loans and find cash elsewhere, and a selling of pledged shares. Exactly what precipitated the funding crunch is not obvious to me. The Securities and Exchange Board of India (SEBI) has launched an investigation into the subject, and perhaps they will have something more to say, but there is clearly a funding crunch which has taken place over the last three or four days and that has precipitated this pull off. I do not think this is fundamentals driven. It is not as if someone out there has any profound insight into the Budget and is therefore selling ahead of the Budget.
Q: It is not like the FIIs have been buying either. We are seeing nothing near the Rs 700-800 crore buy figures we were seeing everyday. Do you get the sense that people are a lot more cautious on this market given its underperformance this year?
A: Clearly in the last two to three weeks investors are tensed, they are sober. There is considerable expectation from this Budget, but there is not any rampant negativity out there which can explain the sell-offs we have seen in a number of midcap stocks. The fact that those sell-offs are associated with stocks where the promoter pledges are high corroborates my thinking that this sell-off is driven more by a specific funding crunch pressure in the local market rather than because of broader macro sentiment or because of FII trepidation. Investors are apprehensive, but I do not think they are negative going into the Budget.
Q: While it is true that FIIs have not sold in the cash market, in the futures market they are selling quite relentlessly everyday. Do you think something has changed in the global environment in terms of perception of risk?
A: The Fed statement a couple of weeks ago showed a mixed view of quantitative easing (QE) than has traditionally been the case over the last couple of years, and that was a critical catalyst. I think a lot of that will change in light of what the Federal Reserve Governor said last night. As expected, Ben Bernanke is taking to the line that QE will continue. So that apprehension will somehow throttle back and will now gradually get taken off the table.
But once again you are seeing a resumption of euro-related concerns. I reckon that too will get addressed. If the peripheral bond yields were to surge, you would expect a statement from the European Central Bank (ECB) to say that it will do whatever it takes. So there are global macro related concerns which have surfaced, but I do not think that has what driven the sell-off. I agree with you that FIIs are using the futures and options (F&O) market to protect themselves from potential downside.
There is also the worrying fact that you will have a Gross Domestic Product (GDP) print tomorrow. Alongside the Budget we will get the Q3 GDP data and given the Central Statistics Office’s (CSO) recent forecast of 5 percent, GDP logic suggests that the CSO will publish a sub-5 percent Q3 number which will probably be the lowest GDP print India has seen for 7-8 years. So it is a combination of global macro throttling back the potential for a bad print from the CSO tomorrow. That is making people apprehensive, but I do not detect a sense among the FIIs that they want to dump their India shares in the near-term and run for cover.
Q: Given the global and local context we have got going what do you think the Budget will provide? Could it be the reason for the market to rally significantly or at best will it just provide some kind of floor to the market?
A: You will have to look at the Budget in two parts. First is the fiscal mathematics which is broadly well understood. Perhaps the FM will announce a 4.6-4.7 percent deficit target rather than a 4.8 percent, but that dynamic is well understood. The more powerful dynamic vis-à-vis driving a rally will be to what extent the FM will be able to articulate a long-term position for this government in terms of tax reform, such as Goods and Services Tax (GST), subsidy reform. That is, throttling back on fuel subsidies, land reforms such as the Land Acquisition Bill and finally infrastructure, what can he put on the table to drive infrastructure. These are the structural issues where the market needs to hear some credible sensible commitments for the government for it to rally on the back of a Budget.