Budget focus on inflation, infra, rural growth: Citigroup

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Head Of Research at Citigroup, Ratnesh Kumar gives his expectations from the Budget. Kumar says that he has very low expectations from the Budget this time around. He expects excise duty on cigarettes to go up by 5-10%. He feels that the focus for the Budget would be on inflation, infrastructure and rural growth.

He is overweight on sectors like software, telecom, consumer goods and capital goods, cement and media. Furthermore, he expects excise on cars and utility vehicles to come down to 16% from 24%. Kumar sees positive flows into local equity funds continuing. He also believes indicators for global risk appetite are still supportive.

Excerpts from CNBC-TV18's interview with Ratnesh Kumar:

Q1: Are you expecting anything big or do you think it will just be incremental in nature?

A: I think the immediate significance of the Budget for equity markets over the last 5-10 years has declined and for the right reason. That's because most of the mega changes to taxation happened earlier. Now what you have is more of fine tuning of taxation and what has emerged over the last 5-6 years is the fact that any kind of policy intentions get taken with a little bit of pinch of salt because of the coalition structure and how much can actually get done.

 

So from that perspective, the expectations are low and that is also reflected by what the market has done pre-Budget.

 

Overall, I would expect the focus to be on inflation, and in addition to that, the rural and infrastructure sector focus will continue.

 

Q: What are your expectations on what might happen with cigarettes; is there a genuine reason to be concerned before the Budget?

A: Our expectation is that the excise duties on cigarettes could go up by 5-7% and excise duty increase of that magnitude should be possible to be absorbed by this sector without too much of significant impact on volumes. But anything beyond that will come as a negative surprise and can have a meaningful impact on the volume expectations for the next year.

 

Q: From an equity market perspective, do you think the Budget might be a neutral event or might be a trigger, either way up or down?

A: I think this Budget comes with a fairly interesting backdrop; you have an unprecedented growth in the economy, in the corporate profitability and at the same time there is the State Election in UP. So that has to be kept in mind and clearly inflation has emerged as a significant political and economic issue. So with that backdrop, I think there will be a fair amount of changes to will address some of these things.

 

But at the same time, while there is a lot of talk about inflation, which needs to be tackled, my sense is that growth orientation of the government policy will continue and has to continue because that is the only solution for a lot of our problems.

 

Q: Aside from ITC, you have a positive bias towards both consumer and cement sector. What has been the problem with both these sectors?

A: Since the last 5-6 months, our strategy has been to stay away from rate sensitive and credit sensitive sectors because we have been anticipating and talking about the coming liquidity crunch and the coming credit-growth moderation.

 

From that perspective, we have been overweight on sectors that are not affected much by higher rates or slower credit growth like software, telecom and consumers. In addition to that, we have also been positive on capital goods, cement and media.

 

Some of the concerns, which might be there on stock specific basis, to us, is not a cause for worry because the non-rate and non-credit sensitive sectors will outperform.

 

Q: Do you expect some series excise cuts in cars and UVs? Is that a sector, which could potentially benefit from the Budget?

A: We do expect excise duties on cars and UVs to come down from 24% to 16%, that is a broad expectation and it will be beneficial for that segment

 

Q: What is your sense on how liquidity may shape up in March because in January, we got nothing in and again in February, we got some money in, but again it's turning cautious before the event? What are your institutional clients telling you about their outlook and what they want to do after the Budget?

A: Starting November'06, money into local equity funds has started to come back. So from that side, we will continue to see reasonable positive flows coming in.

 

On the foreign flow side, the main driver is the global risk appetite. The indicators that we look at for global risk appetite remain quite supportive. In the last few weeks, you had a short-term impact from inflation and interest rate concerns, which will ease up in coming months.

 

So it is hard to predict short-term liquidity flows, but as the market gets used to some of this inflation and interest rate issues, one can possibly have more of stock specific pickings, where there has been fair amount of correction.

 

Q: Do you think the Budget might have the teeth to impact any sector negatively; for example there are concerns on cements and metals?

A: I think all these concerns emanate from the potential steps to basically tackle inflation, something which you can do immediately. And one of the immediate things to do which can be done from policy side, is to cut import duties.

 

So definitely on the commodity side ex-of cement, we have had an underweight position in our model portfolio and I would continue that because that is one segment, which can get affected.

 

On cement specifically, some steps were taken in January with the removal of the import duty, but the main issue there in terms of supply concerns from the overseas is infrastructure and as a result, one hasn't seen any meaningful impact on cement prices so far. So I would remain positive on cement.

 

Q: What do you think is worrying the markets at this point? It's been such a lukewarm run up to the event, is that making it apprehensive, anything that could destabilize the market after the Budget?

A: I think worries are essentially from the liquidity crunch, from the banking system with higher interest rates come through and inflation numbers getting higher. So the worries are how much further interest rates can go and when will the inflation numbers turn around.

 

And in between, because of some of these reasons as well as relative valuations, you haven't sent the same level of foreign flows as the market was seeing last year and hence it comes out as something of a big issue. I think the main thing to be tackled in coming months is for inflation to cool off and interest rates to ease up. And also the overall market and economy to adjust to a slowdown in credit growth to a much more moderate level versus 35% average credit growth that we have been used to seeing in the last couple of years.

 

These kind of adjustments in growth expectations need to be made and then we are on a reasonably solid base.

 

Q: Do you have a year-end Sensex target at Citigroup?

A: Our year-end Sensex target for December'07 is 14,700 to 16,000, which is based on 10-20% premium to the fundamental fair value.