Jan 23, 2013 10:44 PM IST | Source: CNBC-TV18

Budget 2013-14: Expect 0.25% rate-cut; telecom to boom on clarity: Expert

Dipan Mehta, member- BSE and NSE, explains on CNBC-TV18 that he expects a 0.25-percent cut in rates in the RBI policy announcement on January 29 and could be part of the RBI‘s plan to reduce interest rates by 100-150 bps across the entire fiscal.

Dipan Mehta, member- BSE and NSE, explains on CNBC-TV18 that he expects a 0.25-percent cut in rates in the RBI policy announcement on January 29 and could be part of the RBI's plan to reduce interest rates by 100-150 bps across the entire fiscal. Mehta adds that the increased clarity in telecom policy by the government has begun to lure investors' interest back into the sector.

Technical analyst Sudarshan Sukhani of explains that it is too early to estimate if the Nifty is perhaps likely to break 6,000 on the downside and head lower. "The Nifty has become choppy, come down and then rallied. It is not possible in this choppiness which is of the worst kind. So today is a no-trade zone for the Nifty."

Below is the edited transcript of Dipan Mehta’s analysis on CNBC-TV18

Q: How hopeful are you about the finance minister sticking to fiscal prudence in this Budget or are you still cautious about this Budget being populist?

A: With every passing day it is becoming clear that the finance minister and the government are very serious about meeting the fiscal deficit target.  Even the news about the cut in planned expenditure, though it’s not welcome from an economic point of view, shows the commitment of the government to be within the fiscal limits set. The government has been taking the right steps in terms of reducing subsidy, increasing the administered product prices and various other measures to curb expenditure and increase revenue.

Even on the disinvestment front there is a lot of seriousness has been shown in the establishment of a practical methodology for divestment. The Budget to be announced in could be a breakthrough budget in terms of what it does for fiscal consolidation and that could be a trigger for the markets.

Q: Do you think the fall in Hindustan Unilever (HUL), which is down close to about 8 percent over the last two days, could fall a little more?

A: The fall in the stock is a reaction not only to the poor results but also the increase in royalty which was unexpected by the street. It does put the issue of corporate governance in a shadow. No doubt, it is lower than what other multi-national companies (MNCs) charge. This factor of risk has become rife in a lot of MNCs.

The company has been a star performer for the past year or so. When the company was delivering and beating the street’s estimates, investors were prepared to pay a higher price-to-earnings (PE) multiple, but now that there are chinks in the amour some amount of profit booking has started to take place.

The opportunities available at this point of time are far greater than what was available perhaps a year ago. So, investors have set off a trend where the trade is moving away from the defensives into the more aggressive growth oriented or the interest sensitive companies which began to work against HUL. The poor results and the increase in royalty acted as a lure for investors on the sidelines to actually press the ‘sell’ button and shift their holdings to other sectors.

The stock may correct a little bit further from these levels as well because the PE multiple which is certainly at a very high premium is justifiable if the growth rate was high and there was no uncertainty on the royalty front. But with problems in both fronts, I am not sure investors will be prepared to bid the PE multiple much higher.

Q: What do you expect the Reserve Bank of India (RBI) will do on January 29? The finance minister has categorically stated that the gross domestic product (GDP) may come in at 6.5 to 7 percent and may get better through the course of FY14 and FY15. To aid GDP growth the finance minister has urged the RBI to maintain a balance between inflation and growth.

A: The RBI would spread the overall cut of 100-150 basis points across the entire fiscal a by a 0.25-percent reduction periodically. The RBI’s announcement of plans to include the diesel price at market level for compilation of WPI and this could be important for analysing the impact of the cut in rates on inflation. It might reveal a situation where the inflation is factoring-in the increase in administered prices and provide clarity and confidence for the RBI to decide on a further reduction in interest rates.

Right now, a lot of prices are subdued and the inflation at this point of time, is also subdued. If all these factors are adjusted, it might indicate a decline in inflation that could motivate the RBI to undertake a series of interest rate cuts but, for the RBI policy announcement on January 29, its best to factor-in a 0.25-percent reduction.

Q: The telecom segment has been the star for the day. How much of an upmove do you estimate have after the kind of run-up that we have already seen?

A: Telecom is benefiting from an overall reduction in uncertainty in the industry and consolidation. The sector is taking small steps towards increasing rates as well as data usage charges. The run-up has also been aided by clarity regarding the licence fee, although there is a Damocles sword in terms of one time payment of the licence fee for existing operators, but that will get resolved.

These companies have very high operating leverages. So, if they are able to increase their rates and get the top-line going, a lot of it will flow to the bottom-line. For some of the larger companies, their balance-sheets would hopefully start getting stronger as cash flows start to improve.

With the improvement in performance, investors have begun take equal weight or slightly overweight positions on the sector. Results this time around for all companies will be watched quite closely along with any signs of improvement in the arresting of the decline in the subscriber-base.

There is an increase in the number of industries trying to win the of favour of investors and that is the most heartening part about this bull market. A year ago, only a few sectors performed well. In 2013, that number has increased. That is a very important trend and offers a lot of options for investors to deploy their funds.

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