Benefits from oil, govt steps to come with lag: TVF Cap

Below is the verbatim transcript of Shiv Puri's interview with CNBC-TV18's Menaka Doshi and Senthil Chengalvarayan.

Menaka: I will start by asking you what you make of the earnings season that is currently under way. It has been very disappointing on a bunch of different fronts. What is your assessment of how corporate India is doing?

A: By and large a big swathe of corporate India has yet to see the benefits, let’s say, of the improved macro conditions, whether that is the political change, the work that is happening within the government, the fall in oil prices which is a significant benefit. All of these will come with a lag but as of now we are yet to see some of these translate into actual numbers and earnings and one of the things that came out of this conference is in order to get that piece going it is going to be very difficult for it to come from the consumer side of the economy, like it did in 2009-2011 phase. It has to come from investments and within investments it is going to have to be spearheaded by the government in some way, shape or form.

Senthil: Doesn’t that put the government in a bit of a bind because at one level you have investors like you who say who talk about the sanctity of the fiscal deficit and would be looking at that level very closely and yet we are expecting them now to lead or pump prime the investment cycle?

A: Yes, I have two comments to that. First is that fiscal deficit is important in the context of growth. If the growth is low as is the environment that we came off then you have to control the expense line and the fiscal deficit number must be maintained but in order if growth is picking up there is some flexibility on the fiscal deficit side.

The second point I would make is that not all of this has to come from the government’s balance sheet, I mean if you look at some of the Public Sector Undertaking (PSU) companies whether it is the Coal India or the National Hydroelectric Power Corporation (NHPC), or even National Highways Authority of India (NHAI). They are sitting on a lot of capital and it would be great to see that being deployed on the infrastructure side to sort of kick-start the cycle. There is something that needs to ignite and that is the best place for it to start.

Menaka: It is interesting, your part of growing core is now that is putting, if I may say so, fiscal responsibility second to kick-starting the investment cycle in a fashion where public spending leads private spending or the return of private spending so to speak and the bit that you are talking about we are getting PSUs to put the cash on their balance sheets to work is also growing chorus at this point in time. What kind of infrastructure, funding structure would you like to see in this Budget sans which you might be a little bit disappointed by lack of vision in this government?

A: Well the government over the last nine months has from all our work been doing the right things. They are focusing on the right areas, they are putting the right systems and processes in place and anybody you talk to in the sector will agree that there is a lot of work that is being done in the background and that they expect this to improve in some period of time.

In terms of the Budget, there has to be really two key areas that should be in focus. One is on the infrastructure side. Whether that is only through taxation or whether that is through certain benefits or exemptions that is something that they would have to figure out but whether it is in road development which is something that we can start fairly quickly or on the other areas of infrastructure. That is one area that they should focus on and the other is what the government’s talked about which is Make in India. We should have some clarity on make what in India. We certainly don’t have the same level of advantage so to speak, as maybe China in mass scale production of pretty much any good. It is much cheaper to do it there even after we import and bring it out here.

So it is hard for an entrepreneur to sort of say I am going to make this just to create job, he is going to want to look at the returns. Having said that we have in India a lot of strength in terms of technology capability of people and we should use that and see in what areas that can be applied, whether it is in production of industrial equipments or defense, certain medical equipments just things where we feel as a country we have the strengths and address those in the Budget, so we incentivise people to invest there.

Menaka: If I may come back to your view on the markets, given the fact that you are fairly disappointed with earning season I am guessing that you are quite comfortable with the correction we have seen from 9000 levels to let’s today at about 8500 on the Nifty. Markets now finally sort of catching their breaths and the economy catching up with markets?

A: Yes, this is very healthy. In fact if the markets don’t do something like this there is cause for concern. If the market has regular corrections along the way, it is very healthy, it keeps people in check, it keeps reality in check and as many people have said that this is a marathon, we have to treat it that way. Not only for the economic recovery in the country but even for the stock market.

Menaka: Where do you expect markets to go from hereon? Do you expect the Budget to be a game changer, do you expect that by the end of the year the Nifty will be way above 9000 or do you think this will be a year where we will wait for the economy to catch up with the markets?

A: Yes, the latter. It is very hard to put a number on a nine month or a one year perspective event but the economy needs to pick up there. I am more interested in some of the steps that the government has taken, what the results of those would be, what the action is happening on the infrastructure side, what is happening in terms of project announcements, where work is actually starting and once that part of the economy picks up, things after that will follow. So, am much more focused on that than even a one year target or anything big bang in the Budget.

Menaka: What does that mean for you investment strategy in 2015? Some of the stocks I know that TVF has been associated with are stocks like Hero or Pidilite or Bausch. What looks good to you in 2015?

A: Without talking about specific stocks, the areas that still look good for this year would be financial services. We have felt that that is one of the best ways to play the capex cycle, the consumer cycle in India. I feel that even areas like Housing finance, even though there has been some movement in some of those companies there is a very long term secular opportunity where maybe the longevity of that growth is probably not full appreciated. Health care is a segment of the economy that reminds us of where IT services was maybe 12-15 years ago. That IT services sector took a good 8-10 years before India took off and healthcare is like that where the skills that we see in health care companies.

Senthil: How would you play healthcare, is it hospital, is it through pharma companies, how would you play healthcare?

A: In healthcare the best opportunity is through pharma companies that are serving the overseas market. As you have probably seen over the last couple of decades there have been three or four companies in Israel that have built very good businesses and the skill set in India for that to happen is abundantly there. They have proved themselves and the global market is focussed at getting drugs at a reasonable price. That is one big element of what the US is trying to do and it seems that the market sliders are huge and it is an opportunity for companies in India to capitalise on and if you look at these pharma companies there are only two or three large companies. There is a possibility over the next five to ten years to have eight or ten very large pharma companies serving that market.

Menaka: I won’t reiterate all the various challenges that the global economy is facing, the currency volatility, the divergence in central bank movement but I am curious to know how you assess the impact on liquidity flows coming into emerging markets like India and even if on the one hand it will be the economy playing catch up with markets if on the other hand we have overwhelming liquidity flows these markets will move substantially higher?

A: When you look at global liquidity it appears to us that wherever you see in the world interest rates are low and while the US might raise interest rates this year it is likely to be a very slow climb. So as a global investor you sit and look and it is very difficult to earn anything in most places. So then you look outside the US let’s say, and you want to try and find growth options well there if you look at some of the other emerging countries specifically part of this famous BRIC club those other economies are not doing very well. Some of them are de-growing, some of them are flat.

So, you look around the world and you say well, where is it an economy that is even growing at five-six percent with the potential to grow higher that is of size. It is 1.8 trillion where you have maybe inflation coming in down, interest rates coming down albeit slowly over a period of time, corporate growth picking up and valuations generally reasonable and most investors will find that the opportunity here is still pretty strong so overall we will see investment flows into India continue for some period of time and if the government does its part and corporate sector does its part, it could be quite good.