Next financial year, lot of divestments may happen through transfer of shares. This will cushion the deficit to a great extent, Nilesh Shah of Envision Capital.
With the Union Budget 2018 less than a month away, the focus has shifted on the Street’s expectations from the exercise.
The fiscal deficit situation, particularly after the government’s decision to borrow additional Rs 50,000 crore through gilts, has been a bone of contention for the market. Another issue has been the possibility of taxation on long term capital gains (LTCG) on equities, largely fuelled by the deficit scenario.
But Nilesh Shah, MD & CEO of Envision Capital is not worried about it. He does not see major slippages. “Next financial year, you could see lot of divestments happening through transfer of shares. This will cushion the deficit to a great extent,” Shah told CNBC-TV18 in an interview. “The best may be behind us, but the situation won’t worsen like it was 4-5 years ago,”
Speaking on the tax threat on equities, Shah said the nature of taxation must be watched. “Whether it is the period of LTCG going up, or is it on prospective investments or on past investments? If it is just an extension from 1 to 3 years, then that is something the market will absorb and digest,” he added.
Shah also presented views on different sectors for the market. He believes the auto space will be strong proxy for India growth and this is one sector where some leaders are able to demonstrate double digit volume growth of around 10-15 percent, which is remarkable. This shall last many years and to that extent, valuations could look heady in the term. But, in the mid-to long-term, the best story is in India.
Meanwhile, he is looking for value in midcap IT space. “Their ability to grow at a faster pace and in double digits is much higher compared to bigger names. There is underownership in the sector as well,” he said. On Infosys, he recommends being careful with the change of guard. It would be best to wait and watch on how the new CEO delivers and only then take a leap.
In the consumption space, he believes though consumer durables is expensive, two opportunities need to be kept an eye on. Out of airlines, one can look at travel and hospitality, particularly the latter, which run resorts. The other sector is food companies. He bets on shift to organised space in the years to come as a reason. Among laggards, he recommends staying away from oil marketing companies (OMCs). This is the most vulnerable sector and the best has already happened for them.
Below is the verbatim transcript of the interview.
Latha: Change of guard at Infosys today, Salil Parekh takes over is that making you look at the stock with fresh highs or have you already done that and added to your positions?
A: I think this time around one needs to be a little more careful with the change of guard because I think three years back all of us got very in a way positive and optimistic or to some extent exuberant when there was a change of guard. This time around I think clearly one will have to be a little more careful, in a way listen and hear out the new CEO what in terms of his strategies going to be. Obviously, he doesn’t come in from a products background. He comes in again from a services background and managing the kind of the old business. So, in a way will he be able to transform Infosys to be able to position itself well to capture on the new opportunities in technology. So, I clearly think that one will have to wait see what the strategy is, probably see him deliver for two or three quarters and then really take that big leap of faith.
Anuj: Your thoughts on auto space because that has really been remarkable the way some of the - market clearly has made two set of stocks the ones which are leaders like Maruti Suzuki, TVS Motor, Eicher Motors and the others. Both have rallied, but clearly there is bit of a huge valuation mismatch now between these companies?
A: Clearly, autos is going to be a very strong proxy for India growth no matter we could kind of debate and argue about valuations, but clearly this is one sector where some of the leaders have been consistently demonstrate double digit volume growth. I think that is phenomenal. When you have an economy growing about 6 percent and you have some of these auto companies growing at 10-15 percent in volumes terms I think that is remarkable. It is something which I think should persists for a very long time.
It is not a growth opportunity which we are going to see just for a few quarter and it kind of tapers away. I think this is an opportunity which is going to last for many years and to that extent yes the valuations could look a bit heady in terms of the near term, but clearly believe that from a medium to long term perspective it represents one of the best growth stories in India.
Sonia: In auto ancillary, you have so many of these companies that supply to these two-wheeler makers, some of the bigger companies as well anything there that still catches your fancy?
A: We own a stock called Fiem Industries and that is a company which provides lighting solutions to the two-wheeler players, so they kind of supply big time to people like Honda and TVS Motor. If you really look at Honda while of course the Activa and all of that is doing extremely well in India itself. But Honda itself is looking at significantly making India an outsourcing base.
Internally, Honda seems to have cleared that threshold before they basically identify a particular country as a manufacturing base and it has clearly crossed that. So, what you could see over the next 5-10 years is Honda itself turning out to be huge exporter. So, the way we saw in cars where Hyundai and Maruti both have become in a way outsourcing bases; India has become an outsourcing base, we think Honda will do something similar in the two-wheeler space. Therefore a lot of auto ancillaries which supply to these kind of companies I think should be carefully watched for.
Yes, again valuations may not be kind of that single digit or double digit kind of valuations, but nevertheless I think the growth opportunity is significant there.
A: Consumer durable space has got a lot more expensive. I think 2017 was incredible for them from a valuation point of view. It is one of the best performing sectors, so one should be a bit careful right now. But two opportunities which look extremely attractive in the consumer space, one is of course this whole travel and hospitality space and outside of airlines, but you should really look at some of these companies which are into holiday side, the forex side. I think that is the space which is extremely good. Core hospitality, companies which run resorts, I think that is a very exciting space, growth opportunity is phenomenal out there so that is one.
Two is I think on the consumer side again, food as a business I think is a fantastic opportunity. I think that is one space where the unorganised sector still rules and you are going to see over the next 5-10-15 years this whole shift from unorganised to organise, so food I think again represents a very good and a strong opportunity.
Anuj: HPCL and BPCL, yesterday I asked this question to Samir Arora as well, petrol and diesel prices clearly have not been tinkered with for last one month or so, there is no marketing margin which is visible on the website. Now we believe even for cooking gas that monthly price hike has been done away with. Is this risk back on table, not just for oil marketing companies, but for this entire story on the oil and gas pack?
A: Surely for the OMCs, I think one should be out of this space. For the next year or two, one has to be completely out of this space because that is the most vulnerable segment. This is clearly one area where I would be very surprised if the government goes ahead and does the price hikes and things of that kind. So, I clearly believe that the best is already there for them, whatever good could have happened for them has already happened. What you would basically now see is just their overall business growing in-line with the demand for petrol, diesel which would probably be the mid-single digits and that is not really a great growth rate to achieve and therefore one should clearly be out of this sector for the next year, year and a half.
Sonia: Wanted to ask you about the Budget, and your expectation this time because everyone once again has started to worry about the possibility of long term capital gains. Would you be worried as well and what else would you expect?
A: First I hope there is no taxation on long term capital gains. I don’t think it is something which is very material and therefore I don’t think the government should kind of really fall for it and tax long term capital gains no matter how you argue about it and whether long term capital gains should be exempted and things of that kind, but I don’t think this is the right time to do it. It is surely not one of the most important decisions the government should indulge in. So that is clearly one.
Two is, I think there have been concerns on fiscal deficit, but our own view is that you are not going to see some major slippage in fiscal deficit. There could be a bit of a spike out there, but it is not something which is kind of go towards that 4 percent mark and all of that and that is because it is quite possible that next financial year you would see a lot of the divestments happening through the transfer of shares. The HPCL transfer happening to ONGC or potentially many other such transfers happening, which will cushion the fiscal deficit to a great extent. So, yes, obviously the best is behind us in terms of the fiscal deficit and fiscal consolidation, but it is not going to worsen like what the situation was four or five years back. I don’t think we are going to get to that kind of a situation.
Latha: Coming to the stock selection itself, where are you on IT generally? You did say that you would want to watch the Infosys new bosses’ performance, but midcap IT is doing well, as Udayan said valuations is a good argument, is there stock picking over there?
A: I think so because clearly if you look at the frontline IT, I would be surprised if the earnings growth gets into double digits. It will at best remain single digit, unless of course there is a strong tailwind of the currency. So, unless we see the currency going towards 65-66-67 per dollar, clearly the earnings for the top tier IT companies will probably remain in single digits and that is probably a function of their size.
However, the midcap IT are much smaller in size, they are probably a 10th or a 15th of the size of any of these big guys and therefore their ability to grow at a faster pace and maybe even in terms of double digit, I think is much higher versus the top tier companies. I think there is some amount of under-ownership as well in the mid-tier IT space. There are a lot of companies where there has really been no increase in ownership by institutional investors over the last year or two. I clearly believe that, that is a much better space to be in versus the top-tier IT companies.
Latha: Just a hypothetical question we are discussing with Udayan as well, if at all there is a long term capital gains tax that comes in, I am sure it will be a nominal one even if it comes, will the market just digest that and go on? Of course there will be a reaction immediately, but there is still a growth story, isn't there?A: Absolutely, but I think it is going to be the nature, I mean the devil is always going to be in the detail, in the sense what kind of taxation comes in, is it just going to be a normal tax out there or is it going to be that the period which defines as long term, goes up from one year to two years or three years, is it on prospective investments, or is it also on your past investments. Obviously the third one, of course is in a way a dooms day scenario from a markets point of view. However, I think if it is the first two, I think if it is just an extension from one year to three years where equity is put on par with other asset classes in terms of the timeframe, then I think that is something which market will easily absorb or digest.
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