The investor mood is very positive at the moment and investors are looking for more buy ideas than sell, is the word coming in from Prabodh Agrawal, president and head of research at IIFL Institutional Equities. However, he adds that investors may hold off for a bit as the market has already run up quite a bit and may remain in a consolidation phase from now to the Budget.
He is of the opinion that investors should not get distracted by the Budget and continue buying the market. He does not see a major correction in the market.
Agrawal is expecting announcements pertaining to increase in spending in physical and social infrastructure in the Budget. He adds that this increase will partly be funded through increase in taxes – primarily indirect taxes. He expects the government to target subsidies successfully and chalk a clear roadmap of subsidies and social spending. He also feels the government should do something to recapitalize public sector banks. According to him, if finance minister Arun Jaitley manages to deliver on these fronts, the market will be very happy.
He believes the government can look to achieve 3.6 percent fiscal deficit target in FY16, but even if it does miss the mark by a little, it won’t be much of a problem for either the credit ratings agencies or the Reserve Bank.
Agrawal is bullish on the financials and industrial sector. He also likes auto, cement sector and PSU banks.
Below is the verbatim transcript of Prabodh Agrawal's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Latha: Take us through the investor mood at the conference itself, are you getting a sense that the markets will weather the Budget and we are not going to see big falls because expectations are running high? What is the texture of the market gains at this point in time, holdable?
A: I would say the investor mood is quite positive. We have just started our conference so it is a bit early but from the interaction that we have been having with the investors even prior to the conference, I would say that people are looking for more buy ideas rather than sell ideas.
People may hold back their purchases for a while given that the market has had a good run before the Budget so I would think that the market could go through a soft patch or a consolidation phase in the near-term, in the run up to the Budget and immediately after the Budget. However, let us not get distracted by that. I would think that, that is twice a good sort of company to position or medium term to long term.
To answer your question, I don’t see a major correction. I have always held that the correction at the index level is unlikely to be more than 4-5 percent. Individual stocks can correct more. However, these are the times when one could increase the position.
Sonia: It is interesting that you say one should not get distracted by the Budget. Nevertheless what is the expectation from the Budget itself, what are the two or three things if the government delivers will make the markets enthusiastic?
A: Three or four things that investors are expecting, one is there should be increased spend on the physical infrastructure. That is a common sort of expectation for most investors that the government should be spending more on roads, on ports, on airports, on metros, on dedicated freight corridor (DFC), on the industrial corridors, etc. because the prior balance sheets are weak. Therefore at this point of time the government has to take initiative and increase expenditure.
The second expectation is that the government should also be spending on social infrastructure especially education and healthcare. The third, I wouldn’t say expectation but the third, one would expect that this increased spending has to be somewhat funded through increase in tax rates. So, I would not rule out the possibility of increase in tax rates in certain areas for example service tax or many of the exemptions and concessions being taken away.
The fourth area I would say would be that the government should be looking to target subsidies much better. A lot has been done on the LPG side where 60 percent of LPG connections all over India are now connected to their bank account. I would think that in this Budget we would need a more clearer roadmap of what the government proposes to do with the rest of the subsidies and social spending in terms of direct transfer of benefit. So, we need more direction on that.
Last but not the least; the expectation is that the government would do something to recapitalise PSU banks. That is one area we are all expecting a recovery. Recovery has to be funded through bank lending. We know that PSU bank balance sheets are not in a good shape and therefore the government has to recapitalise them in a major way. So, I would say these are the major expectations and if these are delivered the markets would be happy.
Latha: One of the more fundamental issues is where will the money come from? You did speak about an increase in service tax. Even giving a fairly decent buoyancy for service tax, it is still a smaller of the many taxes therefore do you think the market will take it kindly if the market borrowing or the fiscal deficit number came in higher than expected?
A: I would think again - this has been deliberated quite a bit that the government can afford to loosen a bit on the fiscal deficit target of say 3.6 percent for next year. This is a very tight rope walking for the Finance Minister. However, reasonable amount of spending on the physical and social infrastructure is possible.
With all the subsidy that the government has saved on the fuel side, excise duty hikes which have happened and with some more cutting down on revenue expenditure, a bit of slippage would be looked upon as a concern by the market. I don’t think even the rating agencies or the Reserve Bank of India (RBI) would look at it as negative and therefore would impact their credit assessment of the country or momentary policy of the RBI.
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