SENSEX NIFTY
Mar 18, 2013, 06.34 PM IST | Source: CNBC-TV18

Budget 2013: Mkt banks on RBI; policy clarity to woo FIIs: Deutsche

Pratik Gupta, head - Deutsche Equities India, says that post Union Budget the biggest issue for the government is revival of capex cycle. The next big issue for the market will be how much room did Budget 2013 left for RBI to cut rates.

Pratik Gupta, head - Deutsche Equities India, says that post Budget the biggest issue for the government is revival of capex cycle. The next big issue for the market will be how much room did Budget 2013 left for RBI to cut rates.

Many FIIs are significantly underweight on India. If there is any clarification on tax issue and further policy initiatives, then many FIIs in particular, will use current corrections as a buying opportunity.

Below is the edited transcript of his interview to CNBC-TV18.

Q: Interesting timing, just after the Budget you are first off the block and so many questions abounding on Double Taxation Avoidance Agreement (DTAA) Mauritius route. What do you think would be top of the agenda at your conference post Union Budget?

A: As you rightly mentioned, this is turning out to be very timely indeed, right after the Budget and so much confusion regarding Mauritius route. We are also hearing some concerns about the tax revenue assumptions. Now, that the Budget is finally out of the way, the big issue is the clarifications regarding the Mauritius investments.

But, in longer term, the bigger issue for the market will be, what is the likely outlook for the space provided to the RBI to cut rates and other economic reforms outside the Budget? I think the biggest issue is revival of the capex cycle. What plans does the government have to revive the capex. In this respect, we have a string turnout from Delhi.

We are hosting a leg in Delhi on Wednesday where many speakers from the government, MoF, the chief economic advisor and Planning Commission will be present. I think it will be important to get their insight in terms of policy outlook going forward and what is the next bunch of initiatives. I think this will be one of the main drivers for the market now as the Budget is out of the way.

Q: You have been quite positive on the Indian equity market and this conference is also coming on the back of a very poor earnings season and a GDP print of 4.5 percent. Do you think that’s going to be the primary question on a lot of FIIs mind, do I want to invest in a market that’s showing single digit earnings growth for the quarter gone by and 4.5 percent on growth, a decade low?

A: Yes, the earnings disappointed in the December quarter and also the big GDP print. But, I would say this was expected.  In fact, one more thing I would add from an FII and retail investor perspective is that most of them are still significantly underweight on India, especially in some of the western economies.

While the flows have picked up in the last one-two months, a lot of investors has been telling us that for the last two months that fine, we agree that the economy seems to be turning around, fiscal discipline is coming back but the market has already rallied so much that we think that we have missed the boat and we will wait for a correction.

If there is clarifications on tax issue and further policy initiatives then many FIIs in particular will use this correction as a buying opportunity. FIIs are clearly holding back right now, they like to see more clarification and more comfort to see that environment improves especially as far as capex cycle is concerned. In our conference around 80 companies participated which provided good opportunity for investors to interact with each other and know the ground reality, outlook post Budget and view on capex plans and their own plans for FY14 and beyond.

I would be more worried if the market was north of 6000 on the Nifty. Then, one start running into valuation concerns. Now it is more a question on okay it has come off but do we buy or not. Hopefully, we will get answers to our question during our conference.

Q: The CEO’s of big banks like SBI, Axis, ICICI Bank ar attending your conference. Yesterday, they sold off quite a bit. Is there any concern that because of the interest rate subvention being extended, farm loan waiver fears, etc going into election year - that might change the turf of a bit for banks? Do you think because of this exceptionally weak GDP number’s back drop, could the asset quality cycle worsen instead of improving for these banks?

A: Asset quality is the main concern for most of the investors. In our panel, we have CEOs of some of the PSU banks in particular where there are concerns. The chairman of State Bank of India and Bank of Baroda along with ICICI and Axis Bank - their CEOs will be present to talk about the issues relating to asset quality. Situation of liquidity and credit growth raises concerns over the economic growth rate over the next one year. 

I would add one thing on farm loan waiver. We are having a very interesting thematic session this time around. We are hosting India’s first woman sarpanch, Village Panchayat head at out conference and this person we expect will give a pretty unique perspective on what will be the impact of direct cash transfer, the National Rural Employment Guarantee Act (NREGA), other rural development initiatives, information about leakage, farm loan waivers and how do they work.

So this should be an interesting perspective from an on the ground person directly from the village level, not a tier II or tier III town or city but down to the village level. I think all this will collectively give a good perspective on the outlook for banks and asset quality and the rural issues which they face.

Q: There has been a degree of risk aversion globally over the last couple of weeks. Plus, we have a tax issue and then we are going into a tricky March month for equities. What’s your sense of where the market maybe headed? Do you see much more downside risk for this market?

A: We don't see too much downside. This year we are very bullish on equities globally. 

We continue to believe that the developed market equities will do better than the emerging market equities at least in the initial few months. In absolute terms, emerging market equities will continue to do well as well but we will see the emerging market equities really follow in the second half. Italian election is one key event which took place earlier this week.

One of the key issues to find out is what is going on in Europe, what’s happening after the Italian election, what’s the risk appetite like. As of now our view is relatively positive. I think lot of liquidity slashing around and some will find its way to India.    

In India we are looking at all the problems but we think the problems in some of the other countries are even worse. We have structural issues in the west in particular. So on a relative basis, India still looks relatively good. In fact, our global emerging market strategist believes India is one of the better placed markets amongst all emerging markets in the world.

So we are not as worried about a significant downside. Especially given the way the government is moving ahead and also given the way the markets have behaved, a correction we have already seen, I would be surprised if there is a significant correction. The domestic institutional retail investor is largely out of the equity market so the amount of selling which is left over there is probably near the peak.

Q: The issue on capex cycle or the investment cycle that you mentioned. We did not see too much in the Budget to address that problem. So aside of hoping that it will miraculously turnaround at some point, what pointers can one think of or talk about to believe that there will indeed be a turn sometime in the next few months?

A: I think expecting a sharp turn in the next few months is being a bit optimistic. I think it will really have to be driven by the government-owned companies to begin with. More importantly, I think the bigger issue is to first provide clearances for companies where projects are stuck and pending environmental approval or other approvals - that is the first priority and probably the easiest thing for the government to do.

Once those projects get moving, only then we will start seeing fresh private sector capex. For a private sector entrepreneur, firstly, there is election risk coming up next year. Also, a lot of our promoters are pretty badly leveraged, highly leveraged. So I think to that extent, expecting a private sector capex revival in the short term will be a tough task. I think the Budget had some incentives for that.

For example, the road regulator will help the 15 percent tax credit for the investment allowance that should help. But these are small steps in the right direction. But I think the big push has to come from providing project clearances more quickly clearing a lot of stalled projects which is where we expect movement to happen in the next few months. That's one of the thing we expect to come out from our Delhi leg of the conference.

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