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Budget 2018: There is a possibility of leaning towards populism, says Dhananjay Sinha

We are looking at earnings revival going forward. We think that a steady state growth is not more than 10 percent and that is what quite lower than what consensus estimates are or have been.

December 15, 2017 / 12:22 PM IST

We need to ensure that there is stability in policies because things such as GST and various changes around it as well as demonetisation has induced a sense of uncertainty in terms of the policy framework, Dhananjay Sinha, Head of Research, Economist and Strategist at Emkay Global Financial Services, said in an exclusive interview with Moneycontrol’s Kshitij Anand.

We are approaching Budget 2018 which would be the last full-fledged Budget for the Modi government. Will it be a reformist Budget which we have seen in the past or a populist one?

The key issue ahead of the next election will be very critical in terms of how the Budget will be formulated. Ahead of the election, the Modi government will need to garner enough political support for it to win the next election.

We have seen the political equity somewhat dissipating in the recent past especially in the aftermath of demonetisation. Reforms like goods and services tax (GST) weighed on sentiment as well as on economy. Along with that, distress in the rural and agri sector was visible across multiple indicators.

I think the emphasis towards resurrecting growth at a wider level will be very critical in terms of how the Budget will be designed this time around. There will be a good amount of tax measures or even spending measures that will be organised.


If you look at GST, the way it was implemented and then certain adjustments were made signal that government is trying to safeguard the interest of common man.

The government is getting far more cognizant of the fact that general people or people at large might be getting impacted because of the policies.

To summarise, Budget 2018 is likely to be more towards addressing individual concerns, increasing disposable income at the hands of individuals which could be through income tax measures.

Is tinkering with tax slabs possible?

Yes, it is possible. Why I say that is because I feel there will be a considerable amount of allocation towards rural, housing for all, and a lot of these things will definitely be taken care of in the upcoming Budget.

Although Budget is just a statement. I think in the actual roll out of policies this is where the focus will be. The government is also talking about a lot of infrastructure spending which is going on parallelly.

However, I think the focus would be large — 80 percent tilted towards ensuring that disposable income at the hands of individuals should increase.

There might be more allocation towards employment guarantee schemes. We have already seen that increasing from Rs 33,000 crore to almost like Rs 48,000 crore this year.

Employment can be a big focus both in rural and urban area, and for that the government is also trying to look at educated employment in the urban areas.

Will the government be proactive in its approach with respect to rolling out new growth-focused policies despite facing a lot of criticism from the opposition on GST and demonetisation?

The window is very small from now to the next elections. So, the possibility of government waiting for things and then utilising that dividend to deliver is unlikely to happen.

The probability is going to be lesser. I think the government will be far more proactive in taking measures that can increase the well-being or improve the well-being of people — that will take precedence over the assessment of whatever reforms they have done.

If we look at the banking sector, for instance, they have said that we will recapitalise the PSU banks, and for that the government plans to spend about Rs 2.11 trillion worth of recapitalisation through recap bonds and fiscal support of roughly about Rs 75,000 crore.

There are clear pre-emptive measures that are being taken so that the banks are able to start delivering on credit and credit growth, especially with respect to MSME sector, which has been impacted because of demonetisation and GST, etc.

If you were the Finance Minister, what would you have done considering the current situation in mind?

If I am the Finance Minister — I would not be prescribing any tax action but I think the objectives have to be very clearly defined within the Budget.

If you look beyond the imperatives of elections and political objectives, I would say that you can’t de-link such economic policies, especially the Budget from political ramifications.

Looking from a country’s standpoint, it is important to ensure that there is a good amount of incentive that is given to savers. The household saving is very important to revive because without household savings you can’t have a sustainable investment cycle.

If you look back, household savings have been on a decline on a net basis. Eventually, the investment cycle has to revive, along with that private investments have to also pick up.

We need to ensure that there is stability in policies because things such as GST and various changes around as well as demonetisation have induced a sense of uncertainty in terms of the policy framework.

History tells us that uncertain policy framework is not very conducive for private capex irrespective of whatever be the utilisation level. I think the next Budget should actually give a very strong signal in terms of stability of policies.

I think there is a possibility of leaning towards populism. History tells us that a sustainable economic cycle has evolved when the government has consistently increased the capital allocation.

If you look back to somewhere around 1999 to 2004, the capital allocation in overall government allocation increased from 10 percent to 24 percent in a matter of 3-4 years.

What is your call on the sectors right now, we have election uncertainty, we have Budget and then there are 2019 general elections. Any sector you think that could probably sail through without getting much volatile?

Clearly, as a market participant, I would want to be in sectors which are linked with the vision of the government and where the chances of earnings growth are much higher.

Earnings according to me, will happen largely in areas where consumption demand is rising. We are witnessing large flows into agri sector that will induce consumption demand for FMCG companies.

High disposable income would also reflect in higher sales of two-wheelers, tractors, and also small durables such as ceiling fans, mixer-grinders, pressure cookers.

The banking sector, as well as the NBFC sector, will be in focus because if the disposable income is rising, we are also seeing that affinity of households to take loans is also rising.

Going forward, if we witness a revival in disposable income the retail lending will also grow faster as a lot of people will come forward and buy consumer durables, and spend some more on discretionary spending.

From the global cyclical standpoint, we are looking at rising commodity prices. Metals have been doing fairly well. Going forward, ferrous metals can now start participating. We have already seen a good rally as far as aluminium sector is concerned.

IT and pharma. Some analysts are saying the cycle has bottomed out especially for IT. For pharma, the woes still continue. Your comments.

You can say that. From an IT standpoint, people are looking at valuation. So as far as cycle is concerned, one does not know whether it is actually bottoming out because... (Interrupted)

Are there any signs of a revival of demand?

It is there but structurally, if you look at the revenues that are coming from IT has been on a declining trend. If you look at the BOP data, it used to grow at 50-30 percent 5-6 years back.

That has actually decelerated. In last one year or so, it has actually been contracting and its somewhere around 2 percent negative. So, structurally there is a deceleration and we have also seen that there is some bit of margin pressure.

However, there is some good news for the sector as well. If you look at the trend, major economies are in a revival mode. It is possible that at a lower level, you might actually see some bottoming out especially for companies which are strongly entrenched in countries like the US and Europe.

There is a possibility of some betterment, but I am not sure that structurally the pricing power has revived.

The next set of multibaggers will come from consumption and capital goods space?

I think it is already happening. Multibaggers, if one looks at that multibagger thing it is largely a function of flows. For instance, Escorts we had identified in June, 2016. It was Rs 170. It went to almost Rs 750 or Rs 700 plus.

It was a multibagger. My analyst thinks that it can go even higher. But, larger set of multi-baggers have happened in the midcap and smallcap space in the last one year especially after demonetisation and that is more linked to flows into mutual funds.

But, I am not looking at multi baggers anymore because valuations are very high. The midcap index is at 46 times, almost 90 percent higher than the benchmark trailing basis.

The benchmark itself is very high for the growth that has been delivered. I would look at more like an earnings visibility and then consider looking for multibaggers. My bias is more towards largecap names.

So 2018 is when earnings growth should be in double digits or FY2019?

A) If you look at this, this is a debate I have been participating since 2008. I remember telling somewhere around 2010 that earnings will not be more than 7-8 percent that time.

The thing is that it has been even lesser.

In the year 2010 to 2014, earnings were somewhere around 8 percent, after that it went to zero. Even this year, we started with 20 percent plus consensus for FY18 and then it decelerated, now it is hardly anything.

During the last earnings season, it has been cut, Nifty earnings have been cut by almost like 4 percent. Before that, earnings season expectation was 7 percent — if you look at the consensus.

In a nutshell, there is no growth or hardly any growth that we are looking at in this year. But, the second half can be somewhat better because we believe that there is an improvement in demand conditions for the reasons that I have just mentioned.

We are looking at earnings revival going forward. We think that a steady state growth is not more than 10 percent and that is what quite lower than what consensus estimates are or have been.

We are looking at 8-10 percent steady state of earnings growth. But, I would say that the consensus has always started with something like 20 percent growth. If you look at every year and every quarter, we have seen that analysts have downgraded earnings every quarter.

Even though the downgrades were more than upgrades, the target price has been upgraded every quarter. So, the target price upgrades are more than the downgrades but earnings downgrades are more than the upgrades.

That is the trajectory that has continued for several years now. I would say that the steady state looks like somewhere around 10 percent. So I think that is where we will be.

The market even though there was a lot of expectations from 2017 as well with respect to earnings growth but then the market has always climbed the wall of worries and if 2018 as well we see a similar kind of story, do you think it will take some points off from the main benchmark indices?

I think the market has already given something like 18-20 percent this year on a year-to-date (YTD) basis. So it has already performed very well.

It is 26 percent YTD approximately.

YTD 26 percent is huge. If I took you back three years and I told what will be the earnings, you would say this year it hasn’t happened so next year it will happen or the following year, next two-three years it will be 20 percent. That is what you have been told and hence the market has to be higher.

People thought it is easier to make money in the market than from doing business. The key thing to notice going forward in 2019 will be the liquidity situation.

I feel that the mutual fund flows will dissipate. The reason why I am saying is that if you look at the average from mid-2014 till now is about Rs 5,500 crore. Average over the last one year is somewhere around Rs 10,000 crore.

Even if I say that the current flow is one-offs and idle money is coming into the system, it is roughly about Rs 60,000 crore of excess money that may have happened.

If I exclude the three years average of 5,000-5,500 crore that is Rs 60,000 odd for SIP and those regular flows, then another Rs 60,000 coming by way of ad-hoc flows.

Once the liquidity scenario starts to tighten, it is likely that the money will be required for business purposes. Hence, it is possible that Rs 60,000 crore or Rs 50,000 crore worth of money flows that has happened can be exposed to risk.

Then we look at the global thing. So global – it is unclear whether it is going to be stronger or weaker but one thing is very clear is that global excess liquidity will come down because global rates are going to be higher and some of the central banks will start tightening flows.
first published: Dec 15, 2017 12:15 pm

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