Budget 2013 can't revive investment: Kotak Equities

Finance minister P Chidambaram's Union Budget 2013-14 has garnered mixed reactions from market and India Inc. Sanjeev Prasad, ED & Co Head, Kotak Institutional Equities told CNBC-TV18 that the steps in Budget were necessary, but not sufficient.

Also Read: See sell-off if no clarity on FII tax issue: DSP BlackRock

Prasad does not see revival in investment cycle from measures announced Budget alone. "You require more follow on steps if you need to revive investment cycle. For that you still require a lot of clarity on land acquisition process, resource allocation process, approval process, all those things need to be put in place if you need to revive investment cycle," he adds.

Below is the verbatim transcript of Sanjeev Prasad's interview on CNBC-TV18

Q: What is your view on the foreign institutional investor (FII) investment routed through Mauritius? Do you think there has been enough clarity overnight to suit the investors?

A: I assume some clarity will come. So far we haven't seen anything, but given that India requires large amounts of capital flows in various forms whether it is FII equity, FII debt, external commercial borrowing, we require that given a very high current account deficit leading to some clarity. So far, there is a fair amount of confusion as to the applicability of section 90 (A).

As far as the tax residency certificate (TRC) is concerned, one needs to know its role for some of the FIIs which are operating out of tax free jurisdiction such as Mauritius. Whether the income tax authorities will have the authority to look at some of these transactions which are being outright through Mauritius and whether they could potentially come under the tax net. Let us hope for some quick clarification.

Q: Has FM done anything to address the problem of the investment cycle which is our core problem? Did you come away disappointed on that front?

A: Yes. Necessary, but not sufficient that applies to the investment side also. There were some steps which were taken but I don't think they were sufficient enough to excite the investors whether it is entrepreneurs or FIIs or who so ever looking at India more favourably as an investment destination. The only real thing which has happened as far as investment is concerned is the investment allowance issue which a lot of companies would anyway have in other tax benefits. Many of these companies would anyway be under map because of commissioning of new plant.

It is not as if the investment cycle is going to change dramatically based on the announcements which came in the Budget. You require more follow on steps if you need to revive investment cycle and for that you still require a lot of clarity on land acquisition process, resource allocation process, approval process, all those things need to be put in place if you need to revive investment cycle.

The big challenge for India is to do some reforms over the next six-eight months and then again go into slumber as far as reforms are concerned. This start and stop process will not be good for investors who want to take a call on investing money into India whether it is portfolio guys or industrialists, entrepreneurs.

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Q: There were also doubts regarding the provisions made for subsidies. FM defended that by saying that he was looking to do diesel price hikes on a regular basis but do you think that will be enough?

A: Normally, the government does not make a lot of provisions for the next year's Budget. This year the provision that was made in the 2014 budgeted estimates (BE) numbers Rs 61800 crore as compensation to the downstream companies.

A lot of this would pertain to the balance portion of composition that pertains to fiscal 2013. Even if you look at fiscal 2000 BE numbers, provision was only Rs 43600 crore out of which the government has given Rs 38500 crore as compensation pertaining to the balance period of fiscal 2012. So, I don't think we should look at the provision numbers as indicative of what would be the eventual subsidy amount for fiscal 2014 and what the government may eventually compensate to the downstream oil companies.

As far as fiscal 2013 is concerned, the numbers are pretty good. The total budgeted amount is Rs 93500 crore as far as compensation to downstream oil companies are concerned. This is broken down between Rs 38500 crore pertaining to the balance portion of fiscal 2012, plus Rs 30000 crore that has been given in the second quarter, Rs 25600 crore given in the third quarter. That is effectively Rs 55000 crore for fiscal 2013.

I assume another Rs 40000 crore to Rs 45000 will come in the fourth quarter, but payment will be made in May-June of next year. So, that goes into the Budget of next year which is part of Rs 61800 crore provision made for fiscal 2014 under fiscal 2014 BE numbers. The compensation amount is quite sufficient and that is a big positive for upstream oil companies. It seems to be following the 60-40 formula as of now at least based on the numbers that we saw yesterday.

Q: The other problem was growth. Gross domestic product (GDP) at 4.5 percent, is that why Indian markets have started correcting over the last few weeks? Is there a fear that the market may have run ahead of itself on flows with earnings and growth not quite catching up?

A: This is something which we have been warning for sometime that the entire rally which happened in the last quarter of last year was largely driven by flows. There were expectations that the reform process is being initiated and so you would see improvement as far as fundamentals are concerned, macro economic issues being addressed, GDP recovering and earnings upgrading. So far whatever we have seen, this year it has been very disappointing. Macro economic parameters continue to deteriorate, the only improvement we are seeing is on the fiscal side.

Current account continues to be under tremendous pressure. The September quarter numbers were at 5.4 percent. Looking at the trade deficit for October-November-December it looks like the current account deficit is going to be higher in the December quarter. So, that is definitely not good and is going to put a lot of pressure on the rupee, balance of payments (BoP). Then you have earning numbers that disappointed as far as third quarter results were concerned. As of now, we are not seeing any signs of earnings upgrades, but some sign of cuts over there.

If you look at underlying parameters in terms of volumes, margins, profitability, banking system non-performing loans (NPL), you are not seeing any recovery there. Considering consumer staples volumes, you have seen a continuous decline in volume growth for the last several quarters. For example, Hindustan Lever (HUL) volumes used to be in the low double digits four to five quarters back. That has come down to 9 percent, 7 percent and 5 percent in the last three quarters. So, there is deceleration taking place.

The other thing is valuations. When you are looking at consumer companies trading at more than 25 times to March 2014 numbers with consumption slowing down, how long will you defend those valuations.

Similarly if you look at the banking sector, there were a lot of expectations that because of economic recovery the NPL problems would get addressed. Also because of yields coming of eventually, you could see some amount of extraordinary gains as far as the bond portfolio is concerned which could have offset any higher provision as far as the loan book is concerned. Given the market borrowing programme of the government, it doesn’t look like yields are going to come down anytime soon.

GDP looks like it is slowing down further which raises a lot of concerns on NPL cycle not being addressed anytime soon or may be deteriorating even further. So, sector by sector people will start reviewing either the valuation of stocks or sectors or the underlying parameters which have been fairly disappointing. In that context, the only saving grace for us is liquidity.

Global liquidity is strong but if you do not give the right signals to investors and the Section 90 and 90A did not help at all yesterday. This market could still be under pressure because unless you see fundamentals improving, it is very hard to argue for a major improvement as far as the market is concerned.

Six to eight months down, you will start getting into the election cycle and may be this entire reform process will not proceed as smoothly as what we are assuming as of now. Whichever way you look at it, its fundamentals, liquidity, political climate is not very supportive as far as the market is concerned.

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Q: Over the course of next few months will there be more valuation contraction or price-to-earnings (PE) contraction that this market is going to go through?

A: It is possible, particularly in the case of consumers, I would worry that every company is still trading at 25 times plus on March 2014 numbers. You are seeing volume growth slowing down as far as most of the categories of consumer staples are concerned. Auto could also be a cause of concern because volume growth has been fairly disappointing.

Considering four wheeler numbers for the last three months, whatever they reported in November-December-January, in all three months you had large year-on-year declines. There were 9-12 percent declines in the last three months. So, volume growth is not picking up and it is very hard to defend high valuation in that kind of a scenario.

The sector where you could hopefully see some re-rating is pharma, which has come down in the last few weeks. Nothing has changed dramatically, but a lot of stocks have corrected about 10-12 percent. Cadila, Cipla, Lupin have come down a bit. Ranbaxy had its own problems. Dr Reddys has again corrected. The only one which has held up is Sun Pharma. Some amount of comfort on the earning numbers, quality of companies in the pharma sector and you could see some re-rating of multiples there.

Oil and gas space could again get re-rated. There was some correction before the Budget based on concerns about import duty being imposed on crude oil or an unfavourable subsidy sharing mechanism between the government and the oil companies. Hopefully, this Budget has addressed both these concerns. You could see Bharat Petroleum Corporation (BPCL), Hindustan Petroleum Corporation (HPCL), Indian Oil Corporation (IOC) and the three upstream companies also getting re-rated to some extent.

Also there was some good news in terms of the government, looks like it is moving forward on gas pricing issue which would be positive for Oil and Natural Gas Corporation (ONGC). So, that is another area which could get re-rated. There is still some amount of hiding space, but if you look at the broader space, I don't find comfort in consumer names just because of the valuations and very low volume growth.

Interest rate sensitives have their own challenges now looking at the yield scenario and the market borrowing programme of the government. There is nothing for investment in infrastructure for sometime, so you can rule that out.