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Last Updated : Feb 01, 2017 11:41 AM IST | Source: CNBC-TV18

Budget 2017: Capital gains, corporate tax will make or break mkt, says Udayan

Any taxation on equity markets, though unlikely, will definitely irk the markets, CNBC-TV18 Consulting Editor Udayan Mukherjee says.

The most important week of the year is here for share traders, and veteran commentator Udayan Mukherjee believes that two issues will "make or break" the stock market.

In an interview with CNBC-TV18, Mukherjee said capital gains tax and corporate tax are the parameters that the Street would be watching when Finance Minister Arun Jaitley presents Budget 2017 on February 1.

Any taxation on equity markets, though unlikely, will definitely irk the markets, the CNBC-TV18 Consulting Editor said adding that the markets haven’t factored in imposition of long-term capital gains tax.

While the effect of a direct tax cut depends on the amount of relief the government provides, it may not be, however, a game-changer, Mukherjee said.

Commenting on recently market rally, he said that Nifty hitting 8600-8700 levels surprised many of the Dalal Street. The rally was partly driven by a combination of factors such as good earnings report card of companies, global upmove and Budget expectations, he said.


On February 1, consumer-related plays will come out depending on tax cuts announced by the Finance Ministry, Mukherjee said, expressing reservations that such rally may not be sustainable. Housing companies stand to benefit on tax exemptions, he said.

Below is the verbatim transcript of Udayan Mukherjee's interview to Latha Venkatesh, Sonia Shenoy and Anuj Singhal on CNBC-TV18.

Sonia: It is the biggest trading week for us because we have the Budget in between. How should one look at this time around? What are the most important things to focus on?

A: This rally clearly has been a bit of a surprising one because when I spoke about an upmove to you, I probably had 8,400 in mind but I think 8,600-8,700 has clearly surprised most people on the street and perhaps it is not because it is just expectations or riding on expectations from the Union Budget but the biggest trigger probably has been that earnings have been not as bad as most people, including me, would have thought and that has led the market back to the pre-demonetisation level.

It is also important to keep the global backdrop in mind. Even if you take the example of last week, we were up 3 percent but so many other markets were up 2-2.5 percent as well. So we are also tagging along with a global upmove and just to look beyond the last week, if you map global market performance since November 8, just a day before demonetisation, the Dow is up 10 percent, Footsie is up 5 percent and Brazil is up some 15 percent or Russia is up 15 percent. So we have not participated in a fairly significant global move during that period and even last week was a case in point. So it is partly global, partly earnings relieved related to very watered-down expectations and of course a bit of the Budget thrown in as well. All three probably has led to this surprise, which has taken the market up to 8,600-8,700.

Latha: I guess it is the tax angels especially on equities that the market will watch out for. Would attacks on long-term equity gains shake the market, would a redefinition of short-term, these are the two-three things that the market is worrying about. If that happens, are we going to see big losses?

A: It will sour the mood because over the last ten days, people have -- going by last Budget’s example -- started coming around to the view that there is a lot of noise on this capital gains tax but it will not come. It will be like last year -- maybe defer for another Budget and not quite this time around. I think that expectation has slowly got priced into the market. None of us know whether it will come or not but I would say that the two most critical things -- so much focus is on the government’s infra push whether there are small tax cuts, direct tax cuts, how much it will end up stoking consumption but looking at previous Budgets, those do not move the needle so much in terms of the overall consumption bucket in India or the overall infrastructure spend.

It is nice for sentiment that you get a tax cut or re-alignment unless it is a dramatic game changer in terms of direct taxes, which cannot be the best case. If that happens, we will have to reassess the situation but if what people are talking about 2.5 lakhs goes up to 3 lakhs at the lower end, you are going to probably throw in Rs 20,000 crore into the system, I don’t know whether this is a game changer given demonetisation on the consumption front.

You know that the central government’s overall capex is probably close to 1.5 percent. Even if that goes up by 20-25 percent, how much are you going to move the needle? So these are sentiment things on the day of the Budget but I don’t think they lead to major EPS revisions but the two that I would focus on which can make or break the mood on Budget day, one is this capital gains issue that you are talking about which is probably not in the price now and that has the potential of souring sentiment.

The second is the overall corporate tax rate, how much it comes down and net of exemption cuts, what flows down to the EPS of companies and this is very significant because there is no mathematics involved or complicated mathematics involved. It will immediately lead to EPS upward revisions for the entire market or very large part of the market and if it is pricing on that day, that will give you a fairly significant boost to the market even if you add a little bit of rerating on the margin. I would keep my eye on the capital gains and corporate tax and hope something not bad and something good comes in on that front which might just make the day on the Budget day.

Anuj: Your thoughts on Larsen and Toubro’s (L&T) earnings and whether that stock can sustain the kind of momentum it has seen?

A: I am not sure, we have discussed capex related plays quite a few weeks back and it is difficult to go out and buy a lot of capex related plays right now. You can see the sag in L&T’s numbers. Now you can pick out one silver straw in that number and say we can still buy that stock but if we look at the last two years’ analysts expectations on L&T and whether they have been able to justify the kind of buy recommendations that they still enjoy, I would say the answer is no.

The environment is not great for them. I know they are trying to do something about it but I think increasingly it is looking like private capex is about a year away, which means they will have to lean more heavily on public capex. That has margin implications, which may not support 20 P/E kind of multiples where they are trading at right now.

As you said yourself, it is one thing to look at L&T at Rs 1,200, it is another at Rs 1,450. So my guess is that even if the stock does not correct very significantly, there will be some correction I expect, but it might just go on for a sideways consolidation for maybe three-four more quarters till you have evidence or a glimmer of private capex picking up in India. I don’t see L&T firing before that so maybe Rs 1,200-1,500 kind of zone for another three quarters at least for L&T. So maybe not significant price downside but I think a lot of time, a lot of patience will be required still on L&T. I am not terribly optimistic on that.

Sonia: Now the IT space is under pressure this morning, HCL Technologies, Tata Consultancy Services (TCS), Infosys, Wipro all down about 1.5 percent. Ahead of the Budget, what are the key stocks or sectors that one should focus on?

A: That is what I was alluding to. On the day even if there are small tax cuts, you will probably see some of these consumer related plays doing well on that. So you could play for that because it seems quite unlikely that there will be no tax reliefs given the backdrop of demonetisation. So something will happen and that will lead to some rub off in sentiment but I think you should be careful because I don’t think it will be a very sustainable upmove in the consumer names on the back of the Budget day tax cuts because they affect a very small universe of people, there is this sag of demonetisation which will linger for some time. So net-net, I don’t think that will lead to any great spur in investment in consumption unless it is a game changer tax change.

Housing finance companies might benefit if there are significant changes and partly priced in but I would watch for some move on the Budget day from some of the housing finance companies. Infrastructure you might see some temporary rally but again I don’t think it will be sustainable but corporate tax cut, net of exemptions if that comes in, you could see some stocks go up 5-6 percent even on that day among the larger taxpayers because as I said, it directly helps their bottomline.

The two clusters which are always important on Budget day, one is the oil cluster because of the cess changes, which might come about and there is a realistic chance of it coming about this time and of course ITC where because of goods and services tax (GST), you may not see any dramatic changes this time around but you could get a rally on Budget day on ITC, it is possible but the picture will still be not 100 percent clear till you know what the cess amount is but these clusters would be significant movers on the day.

Latha: I do want to get your word on the Trump order on immigration, that is what is keeping the IT stocks sagging today, but is there is a larger cloud on the IT stocks now?

A: It is tough to say because as we were discussing last time, it is time for the Trump actions. The first few actions are not great. I would concede that it doesn’t look like he is going to stop at the rhetoric and some of the pronouncements of the last 48 hours have been deplorable, so I don’t know how this plans out. You were talking about geopolitics, it is always difficult to map those things and price them in but the actions are disturbing.

So I think there is a general overall market risk at any point because of the man at the helm, not just for the IT stocks but those are event-based. So those are very difficult to price in but you have to keep watching over your shoulder because the world is so full of surprises because of the politicians who run it these days.

Sonia: For investors who have perhaps missed out on this rally that we saw, is this still a good buying opportunity or should one wait for a couple of big events like the Budget and the elections to pan out?

A: It is an important question because a lot of people might be feeling a bit restless and anxious because the rally has been quite swift. You are waking up to positive numbers from FII as well, so, people might think that if that tide has turned as well then the market might just run away from them. I am not suggesting that the market is sitting at top right now, I mean this rally could certainly extend particularly if the Budget is good. You could see 8,800 kind of levels quite easily because you could get another leg of relief if the Budget is out of the way but that is in the realm of trading and technicals.

However, I think the experience of the last six or seven months should tell you that periodically because of any spike in volatility, the market is regressing to that 8,800 kind of a level. It happened in December, it happened in November, it happened in June and I am not even going towards the February fall to 6,900-7,000. So, given where valuations have reached now after the recent rally to 8,600-8,700, I think it may not be prudent to chase prices, and wait patiently because after a rally it always looks like the market will not give you a look in but markets do give you a look in and there are plenty of events over the next few months like as you mentioned elections, Budget, this whole global backdrop and even the April quarter earnings where I think you will probably see some more of the sag of demonetisation. It is probably not behind us completely.

All of these might give you an opportunity once again to enter at a stock specific level. So, if the question is whether 7,900 or 8,000 is looking like the floor, it certainly appears that way given the ferocity with which we have bounced back on at least two occasions, but whether you will get another opportunity to buy stocks closer to that level during the course of the year, I would say the jury is still out on that. So, don\\'t chase prices, be firmly on the buying side on panics and that has been consistent as a theme for the last six months or so. Do buy those dips but I don’t know whether we have turned into a market despite the earnings relief this time around where you should be chasing prices because you will never see lower prices again this year.

Latha: The question I was asking was the way stocks like Maruti Suzuki and Eicher Motors have moved up, the leaders of the market, even the NBFCs stocks, the way Bharat Financial has moved up, the leaders of the market last year are making a huge comeback and most of them are back to pre-demonetisation level. Would that be the right way to approach things or would you still want to see first quarter’s numbers?

A: I would want to see first quarter’s numbers. This is not say that this quarters numbers have not been a relief and I think that has what has been priced in. The market and everybody expected weaker numbers and generally speaking in large midcap clusters and many largecap names, you have seen numbers which are not as bad. Now, referenced or relative to expectations, numbers have actually been better which is what has got priced in. In absolute terms, I think the numbers are still not great, so, you will have to look closer into the numbers of say even consumer companies like Hindustan Unilever (HUL), Asian Paints, Arvind Mills, and see the first quarters numbers to basically be sure that demonetisation does not play out in another way contrary to expectations.

Earlier the expectation was that the fall would be dramatic. Now, it is possible that there is a sag; it is like swimming with weights tied around your feet. That kind of an effect where you see a gentle sag, and volumes take many quarters to recover to pre-demonetisation levels, so, that is another possibility which could play out which is why I would want to see these quarters numbers. However, the price action to which you are alluding to, it is certainly very encouraging. There is no two ways about that. Not just with companies where numbers have been better than expected but even with companies where the numbers have quite frankly been ordinary.

However, I think the street was looking for those numbers for a reason to bounce back and that is evident with every kind of number that is coming out, the reactions have actually been more positive and that tells you that the market wants to go up right now and not go down. It has not slipped on the numbers, it has actually fed on the numbers to go higher which is always a very encouraging technical sign.

Latha: Should one look at Idea Cellular positively, an eventual Idea-Vodafone merger, I can’t see any other reason why the market is pushing up Idea today?

A: Conceptually of course but a deal always depends on the fine print of the details. So, you can’t talk right now about whether it will end up being positive but any major consolidation which this will count as can only be positive for the telecom sector. I know that there are a lot of people who are sniffing value in the sector because it is bombed out and I think if there is a contrarian play in the market right now, I think telecom would be very close to the top of the list and that is something which should always make you sit up and take notice.

When you ask 10people and all tell you, forget about that sector, it has gone and I have been on record here saying fairly negative things about the stock or the sector for the last one year, but when everybody gets so bearish, sometimes stocks actually bottom out. So, I think one should be cognizant of the fact that many value hunters could be sniffing at telecom. However, you have seen Bharti Airtel’s numbers, you have seen the onset of the new player and what it is doing to the price structure in the market, so, right now it still looks like a very red sea out there. I think value will emerge at some point maybe and who knows two years down the line maybe these are stocks where you would have ended up making quite a bit of money but right now it requires a brave heart to wade into those red waters.

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First Published on Jan 30, 2017 10:49 am
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