Invest in pharma, cement sector in 2013 advises HDFC Life

Hoping the Finance Minister doesn't present a populist Budget on February 28, Prasun Gajri, chief investment officer, HDFC Life says the FM should try and kickstart investments, boosting savings in the system and consolidate the fiscal deficit. 

Gajri recommends investors to continue being invested in the market from a medium to long-term perspective. Gajri is bullish on sectors like pharmaceuticals and the cement sector. He would, however, avoid the FMCG sector based on its valuations. Below is the edited transcript of Garji's interview to CNBC-TV18.

Q: Do you think this can be a game changer Budget? What are you expecting for the capital markets in particular?
A: I would watch out for three things in the Budget. The first is the fiscal consolidation. I don't have too many doubts that 4.8 percent fiscal deficit will be shown as the number for next year. However, I would look for credibility and what goes on behind that number, what are we really doing to attain that 4.8 percent? If that looks realistic that will be positive.
Secondly, what is important is what we are trying to do to kick start the investment cycle? If that looks positive in any sense then that will be great for the market.

The third aspect is, boosting the savings in the system, especially moving the savings towards financial savings because that is important for the investment cycle as a whole. Also, that number has been falling for the last three years now and therefore, it is important that all these three aspects are taken care of in the Budget and there is no populism.

So, if all this comes true, the market should take the Budget positively. At the same time, there could be stock specific issues because there could be some rationalisation of indirect taxes and there could be certain surcharges. I really don't know because if fiscal consolidation has to happen, the money has to come from somewhere. So, on the whole I would be happier if no there is no populism in the Budget. Some increase in taxes here and there, but nothing very large. However, the other three things should really come through.  Q: How would you tactically position your portfolio or recommend investors to position their portfolio ahead of the Budget?
A: I don't think we would want to position our portfolio for one event. The way we are looking at the market is from two-three different perspectives. One is- are we bottomed out as far as macro is concerned? We have, and the reform steps do look positive.

Now, what we would look for is whether those really continue and what is the impetus the government really provides to them.
Second is, has the earning downgrade cycle bottomed out? By and large it does seem to have while this quarter results have been a mixed bag. I don’t see much more earning downgrades to come as we go along. So, that seems to have bottomed out. What has happened to the flows? Clearly, the foreign flows have continued but the domestic flows have been negative.
It is very difficult to predict how this really pans out, but as and when the interest rate cycle really plays out, money would move back from debt to equity in the domestic market. We have seen a lot of flows to the fixed income funds. As the interest rates fall and that game plays out, people will start looking at equity. So, the domestic flows also should improve and I am hoping that the global flows continue to come to India.
Given that perspective and the fact that we are looking at Budget in a positive manner, we need to get the Budget right because otherwise all the issues of rupee depreciation, the rating downgrade threat etc, all come back to the fore. And that is something the government has been very keen to avoid and all the actions the government has taken so far, in the last three-four months have been to avoid that kind of scenarios. So, I don’t see why they would have a Budget which really takes us back to the same old situation. I do expect the Budget to be positive. So, taken the slightly longer term view and the fact that we are looking at fiscal consolidation, I would be pretty much invested in the market before the Budget but that is not something I would play for. From a medium to long-term perspective it makes sense to be invested in the market. Q: What would be the sectors that you would go long not just for the Budget but for 2013?
A: Two-three themes play out here. Very clearly, while we are firm believers that consumption is a longtime structural story in India, we are seeing a cyclical slowdown. I would avoid that sector especially in the names where the valuations have still not corrected. So, that is a place where we are very convinced that we need not be a part of.
We will be overweight on cement. We would be overweight on select financials. One will have to be careful because there are two events blowing as per financials are concerned. The asset quality issues continue to be there while interest rate cycle could be favourable for the financial sector. At the same time, the credit growth could slow down a little bit. We will continue to be positive on the pharma sector.
We have been negative on the FMCG sector purely from a valuation perspective while we really like the long-term structural story on that sector. We will continue to avoid the companies where the balance sheets are still leveraged and the order flows are not really coming through in a major manner. So, we would not really play the hope of balance sheets improving and then the stock prices really moving up. Those are sectors which I would still continue to avoid.
So, all and all we would continue to play a mixed bag of select large cap names where the earnings growth is not too much under question. Have a mixed bag but still stick to a little bit more quality rather than getting into too much of high beta names because I don't see a scenario where things can improve for the companies whose balance sheets are broken in any major hurry. So, that is still avoidable. Q: On the subject of mobilising revenues perhaps by way of increasing taxes, what according to you will the market consider acceptable? Which tax if raised by how much and which tax instrument if could be perhaps read by the markets negatively?
A: It is very difficult to say but I would assume that certain amount of surcharge on the so called super rich could be taken positively by the market. As long as that is balanced by may be increasing some tax on some long-term savings.
I don't think the market would welcome any wholesale increase in indirect taxes, I think that will be negative in a slowing down environment, but at the same time the market would have to accept some rationalisation of indirect taxes, some of the exempt categories could even come under taxation. So, all in all the market would have to live with it because this is a short-term medicine which we have to take for a longer term good.
We clearly have to consolidate fiscally to bring down the current account deficit. Consumption slowing down in the short run is not necessarily bad for the economy because that will help bring down the CAD, curtail inflation and help boost savings. All this is good for the economy. So, equity markets would take that longer term view. May be there is a knee-jerk reaction for a little bit, but the equity markets will take a longer term view, especially when it has been backed by credible reforms which were happening. If those are carried through along with these measures, the market will take that positively.