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Last Updated : Feb 27, 2015 05:05 PM IST | Source: CNBC-TV18

Budget 2015-16: Expect focus on expenditure; high mkt volatility: Shenoy

Deepak Shenoy, founder of capitalmind.in says one should expect huge volatility in the market tomorrow as announcements are made.

Deepak Shenoy, founder of capitalmind.in says it is very difficult to say what will be announced in tomorrow’s Union Budget because so many announcements, pronouncements that have already been made but one needs to be ready for lot of volatility in the market in accordance with the reactions to Budget announcements

However, if one were to take a cue from yesterday’s Railway Budget were focus was on higher expenditure then the fiscal deficit of 3.6 percent at gross domestic product (GDP) could be at risk, even though expenditure on infra etc would  give higher returns over the long-term.

But in case the government decides to sell more assets, the probability of which is very low then that might excite the market.

According to him currently, the market valuations are high compared to fact that we have degrown seven percent in terms of consolidated profits in the last quarter, which is a surprise considering it is a good economy where the new GDP figure showed 7.5% then how are the Nifty companies showing degrowth. In fact he thinks the valuations should be lower.

Below is the transcript of Deepak Shenoy’s interview with Ekta Batra & Anuj Singhal on CNBC-TV18.

Anuj: A word on the upcoming Budget tomorrow and what kind of market strategy would you employ given that it could be bit of a binary event?

A: Budget is really going to be a very reactive situation. There has been so many pronouncements, announcements, prediction that have happened. I can not say that something will happen or something will not.

One of the surprises in the Railway Budget was that the expenditure was substantially higher than I guessed anyone predicted. So we don’t know if this government will take the same route. If it does then obviously the fiscal deficit of 3.6 percent of gross domestic product (GDP) will be addressed and that will change a few things. Even if that spending were in infrastructure or on something that will give us great return in longer-terms, the shorter-term focus has been that the government might or will put their fiscal prudence above some of these infrastructure spending needs.

On the other hand the government might chose to sell some assets or more assets then they did in the past this is a very low probability and that might excite the market. It will be a reactive thing a lot of volatility. Tomorrow markets are open, markets are traditionally open even before 2000 when the Budgets were on weekends. There is no surprise really but we can expect a lot of volatility I would not like to venture a guess which stock would move just now.


Anuj: A word on the increase freight rate in Railway Budget and if there is a going to be any kind of meaningful impact that you have worked out at your end?

A: The big problem is in pulses. Pulses production was down 10 percent in the summer crop last year, so that means there is low production; there is a 10 percent increase in freight cost for pulses, so that automatically creates a potential for inflation in pulses and this is potentially bad because this is going to affect inflation at least visible inflation from the point of view of the common man in a way. This can affect us about two-three months down the line and that is one of the big concerns. Coal is up about 6.5 percent because they change the grades a bit here and there and increase something by 10 percent and reduce something by 4 percent.

There is transportation of cement and other goods. The fact that freight prices are up 10 percent this year despite falling crude price, falling diesel price for many of these industries going to be negative. It is going to out way some of the benefits of a falling crude price. Having said that it is the only way railways could have funded some of that 100,000 crore that they want to achieve. They have targeted 13 percent increase in freight despite these rate hikes. So I believe that is a huge bet on the economy. I do not know if that is going to happen especially with the freight hikes.

Anuj: Since you do a lot of work on earnings and valuations, we have seen one of the worst earnings season go by, the last quarter. At current stage what is the market valuation looking to you and do you think the market is ripe for a bit of a correction after the Budget?

A: The valuations are at high compared to the fact that we have degrowth of profits, 7 percent in the last quarter just on the Nifty companies consolidated profits. You do not know why this is happening – this is supposed to be good economy, a decent economy, the new gross domestic product (GDP) figure showed 7.5 percent. How the Nifty are companies growing at minus 7 percent and even if you have removed Oil and Natural Gas Corporation (ONGC), they still growing at minus 2 percent on a consolidated added up. There are lots of things that are wrong with that figure and we should be at a lower valuation compared to the rest.

You see stocks in the NASDAQ 100, I was seeing presentation yesterday - even Apple at USD 750 billion valuation is just at a very low PE; it is at 11 or 12 PE. We are talking about similar things in Indian private sector banks that have substantially higher PE. We are talking about Indian IT companies at higher PEs even though they have not justified that PEs in the recent past. We are talking about degrowth in a lot of oil and gas stocks as well because of the fall in crude prices, they are still trading high though some of them have fallen.

However, valuations are high. You might just say you expect 20-25 percent earnings growth next year. If the PE was an indication of what profits would be next year than last January, we wouldn’t have been at all time highs we were last January or February. Today we realise that profits have grown minus 7 percent. So market isn’t an indicator of what profits will be in the coming future. It is just about expectation and I believe that at these expectations levels we are easily going to be disappointed.

Disclosure: You can assume that we have lot of ownership in some of the stocks. We have had BEL, some public sector banks but assume that I as an analyst own some of these stocks.

First Published on Feb 27, 2015 12:01 pm