Emphasising on the need to ensure FII (foreign institutional investor) taxation continuity in FY18, Kotak Mahindra Asset Management’s big gun Nilesh Shah has said the Finance Minister Arun Jaitley must "cast a magic spell" on the Union Budget 2017.
Shah expects Jaitley to allocate significant funds to the roads, railways, defence, social and healthcare sectors during the Budget which is slated to be presented on February 1. He expects a Budget 2017 similar to the one presented last year.
Besides, Shah said, the situation across sectors is improving as currency in circulation is increasing. On a realistic note, the market is just right for long-term investors to buy into, he said.
He advised the next 6-9 months are suitable for accumulating pharma stocks, given that regulatory overhang on the sector is likely to ease. Kotak Mahindra AMC expects pharma stocks to bottom and outperform after 6-9 months, he said.
US President-elect Donald Trump’s policy will be a major cue for the Indian IT cos, Shah said.
Below is the verbatim transcript of Nilesh Shah’s interview to Anuj Singhal and Sonia Shenoy on CNBC-TV18.
Anuj: Are you anymore bullish than you were last time? Last time you sounded very pessimistic?
A: No, again I corrected last time that I am not bearish, I am not pessimistic, I am trying to be realistic and today also I am realistic. Yes, with currency in circulation coming back into economy, things have improved. Some of the results which are too early to say but whatever has come in private bank as well as IT sector, is little ahead of expectations.
So, we still maintain our view that this is likely to be a pendulum market; it will swing for a while before taking a particular direction. For a long-term investor, this is a great opportunity to buy.
Sonia: We have seen leadership come back to banks post IndusInd Bank’s numbers, but you think it is too early to call that?
A: I think it is a bit premature to say that the leadership is coming to banking sector because within banking sector, only those stocks will do well which have actually delivered performance, like you mentioned. We suspect that there will be some banks who are exposed to SME financing which because of rising NPAs in the small and medium enterprises, may not be able to deliver as good results as some of the results which have come till now.
So, select stocks within banking will do well, but entire banking sector to do well, probably it is bit too premature to say.
Anuj: How would you approach the large-cap IT now after hearing from both Infosys and TCS which are down now 3 percent or so?
A: In the large-cap IT space, valuations are your comfort. They are all trading at a reasonably lower level of valuation and just about 10-15 times forward earnings. Here the results are of less concern for the market, the bigger concern is how does the US administration under President Trump deals with H1B visa issue and how do Indian IT companies actually transform themselves from let us into infrastructure and application maintenance to in the digital space.
In the so far IT results which have been announced for TCS and Infosys, we haven’t got that kind of confidence about the policies which US administration will do and neither you are getting that kind of clarity about this transition happening from let us say old part of technology to new part of technology. My guess is that in IT sector, we will have to see one, how these companies are able to create acquisition strategy, second, how they are able to create venture capital kind of environment within their company unlike in western world where we have seen companies encouraging entrepreneurship within organisation; that trend hasn’t caught up in India as much and both these things should result into ultimate transition from IT infrastructure management, code writing, application maintenance to into digital space, into security space, into product and gaming space, into artificial intelligence, into data analytics, essentially all the newer side of technology.
Sonia: Just to talk about the big story of last evening, what are your thoughts on N Chandrasekaran taking over as the Tata Group chairman and the impact that it could have on some of these smaller Tata companies that have been affected?
A: If we see the newspapers today morning clearly, there was a unanimous vote for him. He has been an integral part of Tata Consultancy Services (TCS) India’s largest market cap company. The transition which has happened in TCS has been amazing over last five-six years and we just expect that for whole of Tata Group he does what he has done for TCS then as an investor we will have no reasons to complain.
Anuj: What about pharmaceutical stocks? Do you get a sense that they have priced in the worst because even post Trump statement we haven’t seen these stocks actually get punished a lot and some of them have recovered?
A: We still expect pharma to underperform broad market over next 6 to 12 months. It is not that pharma stocks are going to start outperforming immediately; but subject to that caveat over next 6 -9 months is the best time to accumulate pharma stocks. It will be worth building a portfolio rather than one pharma stock or two pharma stock because you never know which companies will get their USFDA approval for factories, which companies will file applications and whose applications will be approved over a period of time.
Certainly, we expect pharma stocks to now starting the process of making the bottom. From here onwards there will be limited downside, but there could be underperformance if markets start rising. This is the accumulation zone for pharma stocks undoubtedly. After 6-9 months we do expect them to start outperforming as they start receiving FDA approvals for their factories and start filing applications for products in US market.
Sonia: Every year we talk about the pre-Budget rally which remains a mirage. What are the expectations this year or rather any expectations at all?
A: Essentially we expect finance minister to be like Harry Potter. He must cast a magic spell on India’s Budget. On one side, as consumers, we are expecting him to reduce tax rates, increase minimum taxation exemption limit and give more money in the hands of taxpayers so that they can go and spend money.
As investors, we expect finance minister to provide money in road, railway, defence, and social and healthcare so that the private capex which is on the back foot right now can be compensated by government capex being on the front foot. At the same time, we are also expecting finance minister to remember his promise about fiscal prudence path. We expect him to honor 3 percent fiscal deficit to GDP commitment which he delivered in last year’s Budget.
Essentially it is in trinity of impossible, give tax exemption, spend money on infrastructure, and at the same time maintain fiscal prudence. This is possible if finance minister truly becomes innovative in monetising government’s assets, ensuring taxation compliance, using the data which they have gathered in terms of cash deposit into bank.
So, essentially we are expecting finance minister to present a similar Budget which he presented on February 29 2016. On that Budget, two months before the Budget, FIIs were net sellers and next day from that Budget, FIIs became net buyers. February 29 2016 also met the bottom of stock market for 2016 which neither Trump election, nor Brexit, nor demonetisation could shake. So, we want him to do exactly what he did on February 29 2016.
Anuj: Would that mean déjà vu, do you think the FII flows would come back, the market will move on post Budget?
A: My guess is that apart from a good Budget, we also need to assure FII on taxation continuity. We have seen a lot of India dedicated fund managers getting worried especially because of the new circular which has been issued from CBDT. Clearly, their intention wants to tax real transactions in terms of corporate transactions rather than fund transaction. However, clearly we need to reassure FIIs that, that indeed is the case.
Today’s circular has open interpretations, so, apart from Budget, we need to reassure FIIs on continuity of taxation policies. Any change should be prospective, not retrospective.