Mkt to take 'coalgate' in stride; bet on tyre cos: PN Vijay

In fact, the CAG report states that the coal scam is much larger than the 2G scam and has caused greater loss to the country. However, portfolio manager PN Vijay believes this issue will not have a huge impact like the 2G scam did.

“I think there is certain element of fatigue in the economy about corruption, so you are not going to get the type of electricity and drama that we got from 2G on this coal scam,” he said in an interview to CNBC-TV18. He further adds that the equity market behave in mature manner and take this in its stride.

The impact on reforms however is yet to be known. At a time when action from the government is close to zero, Vijay questions if there is anything that can make the reforms process even slower.

Coming to individual stocks, Vijay says he is positive on the tyre space. “I think the tyre space will continue to perform extremely well because of softening rubber prices and extremely attractive valuations,” he explains. However, he believes the upsides for HUL are limited.

Below is an edited transcript of his interview with Sonia Shenoy and Latha Venkatesh.

Q: The government has not been able to move on any reforms, and now with the Opposition attacking the government over the CAG report, one wonders if anything can get executed at all. What have you made of the events that have transpired over the day?

A: The fact that CAG was going to present its report today has been known for a long time, so to an extent we were expecting it. As far as this particular report is concerned, I think there is certain element of fatigue in the economy about corruption. For example, look at the way Anna Hazare’s movement just petered out. So you are not going to get the type of electricity and drama that we got from 2G on this coal scam. So the government maybe able to move it to the Public Accounts Committee, which will take about six months to look at it.
 
As far as the report itself is concerned, one concept I do not accept is of this opportunity loss of natural resources, especially when it comes to allocating coal for captive. This means you cannot sell it commercially but use it yourself. If one uses that argument, then one can question land allocated for hospitals, for colleges, for universities and every government resource. So you need to factor in the end dues. For example, if the allocation resulted in lower power tariffs, or if power tariffs would have been higher if the allocation had not been made like this. So there are a lot of major issues involved, especially since coal is an input for power generation.

So I think for the damage for this is limited at least for the next six months, and I think the market also has been mature enough to take it in its stride. Whether this will slowdown reforms or increase the pace of reforms, I just wonder if it is possible to make reforms even slower.

Q: Do you think there will be any major selloff at all if India losses its investment grade status or do you think global money managers have already factored all of that in and are pretty much just working on liquidity and the drive that the market is seeing because of that?

A: Dr. Rangarajan’s estimate of the GDP growth , even though a bit disappointing compared to his first one, is the highest among everybody. So we are still optimistic about the growth and others. What surprised me was the fact that he brought down the fiscal deficit also. He is talking about a couple of times diesel price hike etc, but I wonder how he is going to manage that, because the subsidies are really the cause for the fiscal deficit level. If he believes that it will be lower that the budget level, he must know something that we don’t know.

On the downgrade, well it is a million dollar question which we keep discussing. Equity markets don’t generally take too much cognizance of downgrades because they are very forward looking. They look at earnings to come etc. When the US and France was downgraded, they had huge rallies after that. These are countries which borrow internationally; India doesn’t borrow internationally, it borrows only domestically from its own institutions. So I think the downgrade will have a psychological effect. Even if there were downgrades, the market has factored, so there is no correlation between rating downgrades and equity markets anecdotally.

Q: We have seen some progress in terms of the Pulok Chatterjee committee trying to undo or disentangled some bureaucracy problems, do you think that could take a back seat since there is so much of finger-pointing?

A: That could be possible, but I get the sense that whatever the effects due to the 2G scam has already happened. Incrementally, the power of corruption charges on slowing down the bureaucracy is limited. I always believe that the first impact is fantastic, but after that the same thing doesn’t impact much more. Case in point is Lokpal and Anna Hazare.

So I think the bureaucrats would be a bit more cautious and it may retard the decision-making in the power sector, but I wouldn’t read too much into.