Don't see any significant tax cuts this Budget: Veda Investment

The Union Budget has not had any significant impact on the market for the last 10-15 years and this year too the trend is unlikely to change believes Jyotivardhan Jaipuria, Founder & MD Of Veda Investment Managers. While there could be some cuts in direct taxes in the Budget, Jaipuria does not see any significant tax changes.The market will not bounce back anytime soon, he says. The recovery may be delayed by around 1-2 months owing to demonetisation and GST. Jaipuria says the third quarter earnings of the current fiscal are going to be worse than expected.Jaipuria prefers export oriented stocks like pharma and IT. He also likes oil marketing companies for short-term investors.Below is the verbatim transcript of Jyotivardhan Jaipuria’s interview to Prashant Nair & Ekta Batra on CNBC-TV18. Prashant: You have money to deploy, so you are actively looking at what market is doing and is likely to do so I want to start by asking you what are you doing; are you waiting for market to drift more or you have already started deploying slowly? A: We have deployed slowly, so we were sitting on lot of cash actually in October and so in the last one month we have reduced our cash positions. We have deployed because we got stocks quite cheap, so we ended up deploying some money. Prashant: Not to get into numbers, just to get your frame of mind, you deployed 50 percent, 50 more to go or you deployed the bulk of it? A: Not the bulk of it, but like we can say we have deployed more than half of what we had to deploy. Ekta: Interestingly, where are you deploying this money; sectors, stocks that you can detail us? A: There are two ways one can look at it. Obviously, now you know the recovery is got pushed and it could be one-two quarters which generally consensus expects or it could be even longer. So, my worry is that we have demonetisation and then we have a goods and services tax (GST), so a combination of all of these could mean that the recovery happens much later than what we were anticipating earlier. Even GST is a great positive but near-term it will have a negative impact because they will be de-stocking. So, there are two types of thing –longer term I still like the domestic plays, I like the autos, I like cement, I like some of the engineering names, so those are the things we keep looking at are they cheap enough to deploy. Near-term, because of demonetisation what has happened is that earnings are probably more protected in the exporters, so we looked at exporters, we have bought few exporters also like this could include pharmaceuticals, it could include something’s like textiles where export is a big part of the turnover. So, it has been a mix of both of these bags actually. Prashant: Because you still haven’t deployed, you deployed a little over half of what you have to you are expecting better prices I assume and most certainly you aren’t expecting any sharp reversals? A: There could be bounces in the market because like if you think of a day like yesterday before the Italian referendum everybody would have said that if the referendum is a big No then we will see major correction in the market which never happened, market bounced back. This you know, you are entering a phase where typically December generally been a good period especially the second half of December you get the Santa Claus rally. However, come January again the results are not going to be good. They are going to be like quite bad and I think they will be worst than what everybody expects. The gross domestic product (GDP) numbers are not going to be good, so I think we have time, we have to think of earnings, we have to think of how earnings are going, so I think we will get a chances to deploy in the market. We end up looking at stocks prices we have a target list, we have some valuations in mind and sometimes you get some stocks falling to those valuations and we go and really buy them. Ekta: What is your expectation from the Budget and what would your deployment be say ahead of February 1st despite a worse than expected earnings season? A: My view is normally the impact of Budget on market is over blown, so like if we go in the last 10-15 years the Budget has not had a very significant impact on market. Like there have been very few Budgets which have changed the course of the market. Even this time I think we will probably be a little similar. What we have to look at and the data point we will get before we go into the Budget is how much of this cash has actually come into the banks and how much is probably going to get cancelled. From whatever the numbers which are coming in the press now it seems that the amount which will get cancelled, which will be much lesser than what people anticipated when this move was announced. So, to that extent the money which the Finance Minister will have to play around in the Budget may not be that much. There probably will be some direct tax cuts, but I think beyond that the Budget is not really going to shake the market too much. It is not going to change like the trend. Prashant: I am just using Asian Paints as an example, it has got the largest rural exposure amongst paint companies, the number one player, largest market share and the industry itself is organised, stock has corrected a fair bit. Is something like that a great stock to kind of buy slowly as it consolidates maybe falls a little bit more or you think even these kinds of names will see much longer to recover, so year plus what is your sense? A: That is where I said that one is the earnings and second is the stock price. So, we have this bucket which is all domestic names where you want to buy good quality companies. At some point these stocks will stop falling ahead of the earnings. So even if there is a pain of one-two quarters more of earnings, the stock prices probably stop falling because people say okay these are good quality companies which I am getting much cheaper than I had six months ago. So I want to buy them and people then start buying it because over a period you have like the impact of this whole demonetisation is going to be that the organised sector is going to gain versus that the unorganised sector. Similarly, the impact of GST is going to be that the unorganised sector will lose out the organised sector will gain. So, both of these events will lead to a better market share for the organised sectors once the near-term pain is gone away. That is why you have to look at companies which three years later will have a much bigger market share because the organised sectors gained and think of okay, so how much of this is a short-term pain priced in or are these valuations good enough for three years later and then you go and buy them. Prashant: My only question is do you do it now? There is no question about the quality of these companies I mean Asian Paints, you can go back to 20 years, you have got a solid track record and that is why I used that example because it sits at the top of what you call quality, but you buy it above Rs 900 or I mean if you do and would you be reasonably okay in your assessment or you would say even things like this could correct more? A: The way we go and our framework is we come with a target price three years later and we say this is a target price, so buying it at this price gives us x-return. If we get it lower than we buy it and then we have a big target list. So, we swift through that okay at current stop prices which is giving us the best return and so do we want to get into that one or do we want to get into this one. So, there are lots of quality names there, so what we are trying to look at is over three years what can give you the biggest return and generally we try and look at stocks which can double in three years.