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Jul 20, 2012, 04.02 PM IST
Sanju Verma of Violet Arch Capital tells CNBC-TV18 that she isn’t holding high hopes for significant reforms from the current government.
Delhi today woke up to the news of National Congress Party chiefs Sharad Pawar and Praful Patel resigning from the Cabinet , putting a dampener on the market’s hopes for policy reforms.
According to Sanju Verma of Violet Arch Capital, this move, however, will not be a major threat to policy moves. On the downside, she tells CNBC-TV18 that she isn’t holding high hopes for significant reforms from the current government.
“As a house we have never believed that big bang reforms can happen. It’s not even a question about whether the government wants to do it or not, it’s no longer about the attitude,” she said.
Last night the Cabinet Committee on Economic Affairs imposed a 21% import duty on power equipment , and passed a decision on a list of other pending reforms, giving some hope to the market that the government may kick into action soon. However, Verma says even these moves are misleading in nature.
“That is prima facie misleading because the actual protection to power equipment manufacturers works out to just 9% because they any case pay 12% by way of excise duty,” she explained. Therefore, she is not too bullish on BHEL or the capital goods space.
Meanwhile, from the auto space, she is positive on Mahindra & Mahindra, Tata Motors and Maruti. However, she adds that Maruti may see a downgrade if its labour unrest continues.
Below is an edited transcript of her interview with Udayan Mukherjee and Mitali Mukherjee.
Q: This morning the market will be a little overwrought about these political developments -Sharad Pawar and Praful Patel resigning. Do you expect it to come in the way of the market’s policy expectations at all or do you think it will blow over?
A: I think by and large it should blow over and I don’t think policy expectations if any will change. I say this because I think the developments over the last two months have clearly emboldened the current Congress-led UPA after reigning in a truant Mamata Banerjee.
The only thing that the market will be worried about is whether there will be big bang reforms, and as a house we have never believed that big bang reforms can happen. It’s not even a question about whether the government wants to do it or not, it’s no longer about the attitude. The timeline simply suggests that if you are expecting big bang reforms by way of the GST Bill for instance coming through in FY13, that is certainly not going to be achievable.
Maybe FY14 is more like it, and I say this because it’s not only to do with the constitutional framework with respect to the GST Bill that needs to be put in place. The legislative process I am told has already started, but there is a plethora of other things that need to be done. States have been asking for 50% say in the GST council which will be formed, which the Center has yet to take a decision on. The Center a couple of months back had reduced the central sales tax from 4% to 2% and have told the states that we will compensate you before we introduce the GST. Till date states have been clamoring, but that 2% loss which the states incurred, that compensation works out to Rs 20,000 crore and the Center has just kept mum not disclosing whether it intends to compensate states for the loss in CST.
So I think there are a lot of other smaller nitty-gritties which need to be taken care of. As far as FDI in retail is concerned, I have always maintained that there will be a bit of ad hocism, some kind of tweaking around, ditto with the Pension Reforms Bill.
A: As far as the 21% import duty is concerned, that is prima facie misleading because the actual protection to power equipment manufacturers works out to just 9% because they any case pay 12% by way of excise duty. That said, 9% protection in real terms and not 21% as people would like to believe is not less. More so because it comes at the expense of somebody else taking the pain and that is the power generative companies.
There has always been a debate in the recant past about whether to go overweight on power generation companies or power distribution companies if at all you have to be in the power utility space. I think that debate will continue for a while. I am not particularly gung-ho about BHEL. The point is that these kinds of regulatory concessions can only do so much for a company, the classic case being BHEL which reported Rs 28 by way of EPS in FY12. In FY13 and FY14, I will be surprised if they manage to even do something like Rs 24-25, which is what the market consensus seems to be. Here is a stock which use to trade close to 20 times 2.5-3 years back and use to have CAGR growth of 25% plus both in terms of top-line and bottom-line. Today this stock has a dividend yield just shy of 3%, it is trading on both FY13 and FY14 earnings at less than 10 times but still there are no takers.
I think this is a classic example of the fact that legacy is not good enough and these kind of regulatory concessions are not good enough either. You really need to re-invent yourself, which the likes of BHEL have not done, So while they may get some breather from further competition, at the end of the day it is only a breather and they need to re-invest themselves.
Particularly for BHEL they have nothing much to look forward to because the 12th Five year plan orders have been given and it is too early to bid for the 13th Five year plan orders. In the 12th Five year plan I don’t think BHEL has really got much to be proud of. At the end of the day my personal sense is that even at less than 10 times a company which is likely to de-grow over the next two years is best kept away from with respect to making an investment there if at all.
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