Diesel price hike raise Budget hopes; boost mkt: Edelweiss

In keeping with its reforms agenda, the government on Thursday partially decontrolled diesel, allowing oil companies to hike prices by 40 to 50 paise every month for retail customers and around Rs 11 for bulk consumers like the railways. Although, the move has triggered fears of inflation, Vikas Khemani of Edelweiss Securities believes it is a positive and welcome move that reaffirms the government's resolve to contain the fiscal deficit.

Khemani also said that it builds up expectation for the budget and will certainly create a positive sentiment for the market."Investors are reading it very positively," he added.
Also read: Why is IIFL against RBI cutting rates? Here is the edited transcript of the interview on CNBC-TV18. Q: How are you reading the government's move in terms of asking oil companies to pass on a small hike every now and then? Will this be a game changer like the rupee market seems to be reading it and running up the rupee or do you think it will go the petrol way? How bullish should you be on this and how much should you buy?
A: I think this is a very positive and welcome move and it only reaffirms the government's resolve to carry out the required measures in terms of getting the fiscal consolidation in place and carrying out the reforms process which they have started in the recent past. Every such move only reconfirms and reassures market that government's intent is very much in place. I think this also builds up some amount of expectation from the budget that the government is likely to present in the next few months.
I think this is a very positive move and we have been saying that. It is very clear that this government seems to be wanting to go into election with clear-cut reforms and a growth agenda than really with populist measures. This is one more indication in that direction. So far the trend has been that the governments are winning elections because of the reforms and growth agenda, not the populist measures. So I think this direction seems to be very good and markets would like it.
Investors are reading it very positively. Obviously, if it gets followed through by many more things which are expected as well, this will be a good sentiment for the markets. Q: The intent of the government is quite evident since September 2012, in terms of reform agenda etc., but the implementation is key and there are now some economist reports indicating that the impact on the fisc is possibly biggest at this point in time and that continues to be our biggest problem in terms of the twin deficit problem that we are facing for FY13 and possibly going into FY14 as well. Do you sense that the equity markets are running far ahead at this point in time and not factoring in the possible risk that we are facing from the twin deficit problem?
A: Markets will always react ahead of announcement. When market rallied post the change in the finance ministry, obviously the market built in some expectation of some action by the new minister. With every new action, markets are cheering up further because I think for every believer there are sceptics in the market, whether they will get carried out or not.
I think the sceptics are getting converted into believers and that thing is going to continue as the government keeps on delivering on the reforms agenda. These are giving some indications that government is clearly resolved around getting the fiscal consolidation right and if that happens there will be a lot more belief around what they present in the budget.
The Budget will be taken much more seriously. It will not be taken like it was thought in the past. It will no longer be like you put some estimates and they are not achieved. I think the Budget will be a serious document this time around and hence, in my opinion there will be a lot more cheering and there might be a possibility that the government might do something populist in the later part of the year, before the election code of conduct gets implemented. But, I think it is clear to me that till September-October, the government will carry out the pro-growth agenda very clearly.
_PAGEBREAK_ Q: How would an Oil India investor really approach the divestment? The government did not keep its word on petrol when it said it will allow the oil companies to price it as and how the market dictated. If you are an Oil India investor, how will you approach the divestment? Will you believe the government's promise and go ahead and buy the share?
A: Wherever any government makes a promise, obviously you take the risk into account that something might change on the policy front should the government change or should any leadership change happens. I think investors are very clear when they make those kind of investments in public sector enterprises and they know that those risks very much exist.
That is the reason why there is always a valuation gap between a public sector organization and a private sector organization. That continuity of policies, continuity of leadership are one of the big reasons why you see that kind of discount continuing and that is very much visible in what you see. Q: What are you positive on in terms of sectors after the bunch of results you have seen from now until the end of the quarter? What will your bets be?
A: Banking continues to remain our favourite and that will continue to lead the rally. As interest rate cuts happen and as the concerns around asset quality keeps on receding, we will see that sector continuing to do well. Another sector where we have been quite positive is materials or metals, partly because of the international impact of China recovery and improvement in the prices and we think that sector will continue to do well.
Thirdly, some of the selective names in the infrastructure space, the beaten stocks have some more value in them and I think with the interest rates recovery coming down, we will see some benefits. So we think that sector will also continue to do well. We think consumers will remain underperformers.
IT has been quite positive, given the continuous weak rupee and some improvement in the developed markets. So IT is the sector where we have been quite positive. These are the three-four sectors and media is the one of them because of the recent digitisation move we have been very, very bullish on it. We think that is a structural story for the next couple of years.