The recent market rally seen on back of arrival of new RBI governor Raghuram Rajan and his ambitious agenda may be short-lived because from a medium-term perspective, we are not out of the woods yet, Ajay Bodke, Head - Investment Strategy & Advisory, Prabhudas Lilladher believes.
We have received most bountiful monsoons this year, the best since 2001. Rupee’s sharp depreciation from the past few months will be beneficial for exporters and BPOs and its impact will be seen in a few quarters, these are few positives for the market. But, long terms concerns on macros still remain, he told CNBC-TV18 in an interview.
Bodke is bullish on engineering conglomerate Larsen and Toubro (L&T) and suggests investors to hold the stock as a part of their core portfolio. From the auto space, Bajaj Auto and Hero Motocorp are well placed on the back of uptick in rural demand and attractive valuations. But, he is cautious on Mahindra and Mahindra (M&M) and Tata Motors.
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Below is the edited transcript of Ajay Bodke’s interview with CNBC-TV18
Q: Are you convinced that the market is still finding a bottom at 5,100-5,200 terrain or do you think it could still dip?
A: We have seen a lot of exuberance after Dr Raghuram Rajan took over in the last two days. But I feel that in the medium-term, we are not yet out of the woods. There are a few positives that the market is seeing and one of them has been sort of a benign divine intervention. We have got one of the most bountiful monsoons, the best since 2001. The latest figures from the ministry of agriculture show that the area under cultivation is up 9 percent and in case of pulses 25 percent, cereals 15 percent, so this should have a salutary impact on consumer and food inflation post harvest.
Also the 25 percent depreciation in rupee over the last few months overtime with a lag will feed into the non-differentiated merchandise and service exports because most of India, exports are price led. In areas like leather, chemicals, gems and jewellery, auto ancillaries and BPO and IT services, the impact will be seen, but with a lag of a few quarters. Also talking about some of the competitors like China, South Korea, Philippines (for BPOs) are concerned, their currencies haven’t seen the kind of mauling that Indian currency has seen. Hence the terms of trade have turned in India’s favour, but we need to wait for a few quarters for the exports to come.
On the other side, there are many headwinds. If you look at the fuel subsidies, 13 rupee drop from 54 to 67, since the presentation of Budget had led to roughly Rs 1.04 lakh crore of increase in fuel subsidies assuming 40 percent of that is dumped on to ONGC, OIL, we are looking at 0.6 percent of gross domestic product (GDP), Rs 60,000 crore of incremental subsidies on an annual basis that the government will have to budget for.
The quality of fiscal consolidation is also important in addition to ensuring that we do not cross that redline of 4.8 percent. There are four pressure points I see developing. First, the fiscal deficit for April to July period is at around Rs 3.4 lakh crore or around 63 percent of the full year’s target of 5.4 lakh crore. Net tax receipts had been budgeted at 19.1 percent at the time of budget and the real GDP growth assumption was 6.5 percent.
Now, RBI itself is saying 5.5 percent, Dr Rangarajan is saying between 5 percent and 5.5 percent, on the street we are talking of sub-5 percent. So we need to see as we progress, how the net tax receipts mop up, whether it is in line with that 19.1 percent number. The second pressure point is telecom receipts. Last year we had budgeted Rs 58,000 crore in FY13, we did Rs 19,000 crore. This year we have budgeted Rs 41,000 crore, we haven’t yet seen any significant chunk coming in there.
Divestments last year were budgeted Rs 30,000 crore, did Rs 24,000 crore. This year again we have budgeted Rs 40,000 crore till now we have done six companies amounting to just Rs 1,350 crores. On SUTTI (Special Undertaking of UTI) and Hindustan Zinc-Balco Rs 15,000 crore might be realised. We need to keep in mind all these things on the revenue and expenditure side to ensure that we do not cross the redline on fiscal deficit and quality of consolidation because the promise was to cut revenue deficit by half a percentage to 3.3 percent in this financial year.
The way we are seeing subsidies going out of hand, we need to have a swift and surgical intervention by affecting at least Rs 7-8 increase in diesel prices. If it is not politically feasible then it will feed into inflation this year. At least partial decontrol – I remember Dr Kaushik Basu gave a recommendation that have a fixed subsidy per litre for diesel, kerosene and for per bottle of LPG at least market then can take an assessment about how much will be government accounts for the full year be hit.
Q: In your top picks list, you have Larsen and Toubro (L&T) as well, that stock has seen severe price erosion but is this a good time to be buying L&T?
A: We are betting that the country's capex cycle should see some sort of a revival in a couple of quarters from now. Hundred and fifty seven large projects worth Rs 1.6 lakh crore were cleared by CCI in July end. In August, we have seen further 87 projects worth Rs 1.8 lakh crore being cleared out of which around 18 projects of Rs 85,000 crore are in power sector. L&T is ideally placed to ride any improvement in the capex cycle that should eventually happen in a quarter or two down the line. Hence we are advocating investors to have L&T as part of the core portfolio.
Q: You have Hero Motocorp and Bajaj Auto in your list, you are not fond of Tata Motors?
A: We were looking at Mahindra and Mahindra (M&M) and Tata Motors some time back, but we realised is that diesel price hike that is imminent and slowdown in UV business has made us cautious on M&M. We relatively prefer Bajaj Auto and Hero Motocorp because we are seeing rural demand coming back quite strongly post harvest. That is the reason why we are advocating switching over to the two-wheeler pack where valuations are also looking very reasonable. So we are more positive on Hero Motocorp and Bajaj Auto.