India story intact; ordinance on Food Bill dampener: UBS

The fact that the Food Security Bill is coming in the form of an ordinance will be a worry for the market because that dampens the entire approach of the government on reforms said Gautam Chhaochharia, UBS India. It is like taking two-steps ahead and one step back.

However, assurance from the government that they won't cut down on expenditure is good for the economy, he added. Also the fact that Finance Minister on Thursday reiterated that the reform process is not completely over because of pre-election environment is a key for India's bottom-up story, he added. Finance Minister, P Chidambaram at a press conference said, the government will leave no stone unturned to achieve its revenue target. "We are doing everything we can to revive investment sentiment." He also told reporters that the government has been able to achieve "significant results" on the economic front in the last nine-months. Stock specific,from a medium-term perspective,at current levels Apollo Tyres looks reasonably valued. Also read: Chidambaram fails to announce measures; rupee extends fall Below is the verbatim transcript of his interview on CNBC-TV18 Q: As a stock investor, was there any positive message at all from Chidambaram's press conference? A: The positive message in our view is that he kind of reiterated that the entire reform process is not done or is not going to be thrown away just because of pre-election kind of environment and that has been the case for last few months. They have delivered. We had seen some kind of a lull over the last month or so in terms of real tangible action, he has again raised hopes in that sense and that would be the key for India bottom-up apart from the global macro factors. Q: Soon after the FM's presser, we had the food minister admitting that the food security bill is coming in the form of an ordinance. The finance minister also said that he is going to continue with expenditure and not cut them savagely like he did it last year, will the market worry if the food security ordinance does get passed? A: Both are different issues. The Food Security bill will be a worry for the market. It takes away from the entire reform and fiscal consolidation process which the government had started off. So that will be a dampener but again things to highlight there would be how much impact would it have in this particular fiscal because just announcing a bill and then rolling it out. So it may not have an impact this year. Q: Of course it may not have an impact this year because it would get quite a while to get the executive and administrative machinery going but it still confirms in the form of a right the expenses that will have to be incurred in future years, so will the market worry about it at all? A: Definitely. It dampens the entire approach of the government on the reforms part. This is kind of a step back so after taking two steps ahead, you are taking a step back. So that is definitely negative. On the other hand about the overall expenditure side, that is something which we view positively because if you cut down expenditure at this stage of economy when growth is slowing down, it can have a negative impact. So what you need is mixed change in expenditure, not just absolute expenditure numbers so the mix has to change. Although the food bill does not help that but at least from the budgeted numbers the mix change does look as something the government is trying to do. Q: What is the near-term outlook on the markets now? A: Near-term outlook is driven by what is happening to dollar, yen etc and there, our regional and global guys have been saying that this is kind of a dry run, but not necessarily a crisis because the entire move in treasury yields etc is not in sync with the recent numbers on the US economy. So while the recovery outlook for the global growth has dampened over the last three-four weeks, specifically compared to earlier in the year, the treasury yields have gone up. So that is not in sync with these two data points. So, either we see treasury yields coming off, which is our base case for the near-term or we see recovery coming up in a big way. Fed too has said that the tapering will be linked to hard data on economic recovery. In our view, this is not a beginning of a crisis; it is kind of a technical or profit taking or whatever you want to call move in the near-term. Q: You do not see more weakness in the markets from hereon? A: We do not expect this current volatility that we have seen in the international markets to continue for long. It might continue for a day or a week, which is always difficult to call but this is more a near-term risk off environment rather than a beginning of a crisis. Q: At what point will you buy Apollo Tyres, it is down, it is a lower circuit for that stock now, Rs 73? A: We are still doing the numbers but the absolute valuation still looks okay. As we have historicaly seen markets do not leverage, specifically in this kind of an environment. So that can keep dampening the stock price in the near-term. But from a medium-term point of view, even at current levels, the stock is reasonably valued. Q: Titan Industries is showing some green today but is the bad news now priced? A: The clarity on the bad news even for the company it said is not yet clear. In terms of how they will operationalise under the new regime. In terms of valuations, it has definitely come off but again that financing regime will be critical because if increases the volatility of the earnings then obviously the stock may not get its earlier price-to-earnings (P/E) multiple. While, if they are able to replicate similar stability in the gold price linked earnings then obviously this is at attractive levels. That clarity is still awaited. Since It has corrected a lot, it is less expensive than it was earlier.