Expect 10-15% returns in 2016, downside limited: Kotak's Prasad

Investors should expect 10-15 percent return from equities in this calendar, Sanjeev Prasad, Senior Executive Director & Co Head (Strategy), Kotak Institutional Equities tells CNBC-TV18. Prasad says the feedback he is getting from his investors is that they are positive on India over the medium term.He says valuations are beginning to look reasonable, and sees limited downside.While there is pressure on the Finance Minister to pursue growth through borrowing, Prasad says maintaining fiscal discipline will be viewed as a positive by the market, Prasad says. At the same time, he feels it will be a challenge for the FM to limit fiscal deficit to 3.5 percent of GDP in FY17.He is not overly gloomy on public sector banks and says they are not going to go bankrupt.Prasad expects a 5-6 percent in earnings estimates for FY17 as well as for the following year.He is bullish on Ashok Leyland, and sees it as a play on economic recovery.Below is the verbatim transcript of Sanjeev Prasad’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Latha: What is the sense from the guests who have come? Is this 'India the best boy in the emerging market basket' theme still alive?A: A lot of investors have come for the conference but I am not very sure they have come with that India is still the best boy in a bad neighborhood etc. The issue still remains that India is already quite overweight in the portfolio of the most emerging market funds. You are seeing continuous outflows from all the emerging market funds.So, the problem is Indian valuation is still on the expensive side compared to many other emerging markets, which have corrected significantly over the last one to one and a half years. Indian valuations are still holding up on a higher side. That is one of the reasons why India has been a significant underperformer compared to some of the other emerging markets over the last one to three months period.People do like India from medium-term story, but given the fact that they already have a lot of money invested in Indian and valuations are still on the higher side, they are taking some money off the table at this point in time.Sonia: What is the expectation from the Budget this time around? Most people that we speak to believe that the Budget could be a non-event and it could be at best a one to two day affair and the market will then move on to its downtrend. What is the sense you are getting?A: There can be several things in a Budget which can at least provide a lot more positive fillip to the sentiment. Look at it this way that the fiscal numbers in a way are ultimately just representation of the government’s revenue expenditure numbers, but there is a lot which can be done within those numbers.If the government keeps the fiscal discipline and targets at 3.5 percent, gross value added (GVA) - gross domestic product (GDP) which is the target for March 2017 year, so the market will take it positively. Reserve bank of India (RBI) will look at it more favourably given the fact that government is maintaining a sufficient amount of fiscal discipline.Within the constraints the Budget if we can find some other ways of raising money that is you target a multi divestment program, telecom spectrum sales etc which can be used to fund the infrastructure both on a rural side as also of urban infrastructure again that would be positive because it can provide some amount of fillip to the investment cycle, which is struggling at this point of time. Private sector investment is very weak.So, it is just not a numbers game. It is also what direction the government looking at in terms of managing different objectives at the same time. On the one side you want fiscal consolidation, on the other side you also want some stimulus to growth so how well the government can play these two games at the same time let us see.The second important thing on the taxation side there is a lot of expectations that eventually the government will be able to simplify the taxation systems in India both direct and indirect. As of now indirect taxation system is stuck because of no progress on good and service tax (GST) constitution amendment bill. On the direct side, the government can start the process of simplifying the direct taxation regime as it has promised in a last Budget so reduce the corporate tax rate and start removing some of the exemptions. So, again that is a positive step in the right direction that finally India is moving towards more simple and transparent taxation regimes compared to very complex system that we had so far.So, in a way the Budget can be interpreted as narrow presentation of the government numbers. However, it can also be looked at providing some amount of the direction to the economy, government’s philosophy and its economic agenda so on and so forth. I hope it is much larger thing then just a presentation of the numbers.Latha: Banks are not a set of stocks you would look at before the Budget. At the most, the market borrowing program will impact bond prices but this time around there is an expectation that there could be something with respect to public sector banks either overall corporate governance or perhaps just tackling of non-performing assets (NPAs). Anything that would make you play that sector?A: I don’t know whether anything specifically will come in the Budget. The government has already promised a certain amount of capital, which will be given to the public sector banks in 2017 about Rs 25,000 crore, same as the amount for fiscal 2016. Over and above that, do we see the government finally looking at creation of a bad bank? I am not very sure. It is not a Budget thing. We can do it outside the Budget.The other important thing which we would like to hear from the government on this matter is the bankruptcy bill and how close we are to passage of the bill and creation of bankruptcy code so on and so forth. So, again a lot of stuffs can be announced in a Budget not that if everything will get a security immediately. However, as long as a roadmap to tackle non-performing assets (NPA) problem and the issue of large non-performing loans (NPLs) in specially the public sector undertaking (PSU) banking systems what kind of capital will be required against that; I think it is still a positive move in the sense the government is cognisant to the problem and doing all the right things to address the problem.Sonia: I was going through your model portfolio and you have introduced Ashok Leyland in to your portfolio with a 200 basis point weightage. There is this cash for clunkers scheme that the market is hopeful on -- scrappage of old trucks etc. How much will that benefit some of these commercial vehicles (CV) makers like Ashok Leyland and what kind of returns do you expect from this pocket say over the next 6-12 months?A: Ashok Leyland is more of a play on the economic recovery which we are looking at. If you looked at parts of the economy, finally you have started to see some movement on the road and construction side, on the mining side also so that should normally benefit the heavy commercial vehicle (HCV) segment. We are already seeing that in some cases companies have been telling us that there are seen some shortage of construction equipments. There is fair amount of movement on the ground.The other thing is, road traffic will continue to take market share away from railways given the fact that if you look at the implications of 7th central pay commission as far as railways are concerned I don’t think railways has any option but o increase rail rates significantly to compensate for the increase in salaries for its employees. In a way that could benefit road transport sector in terms of freight advantages compared to the railway sector. So, that is medium-term phases which will play out over the next few years.Lastly, if the government does implement a scrappage scheme, which is being talked about again Ashok Leyland it is a big beneficiary of that. Do keep in mind the fact that almost one-third of the HCVs in India are more than ten-years old.So, I assume those are the ones which are adding to air pollution. If the government is serious about tackling air pollution, I think it needs to get some of these older vehicles off the road. If there is a cash for clunkers scheme again Ashok Leyland should be the big beneficiary of the same.Latha: ITC, down 3.5 percent today, almost and at a 52 week low. Is this some kind of a pre-Budget move what is your own view on the stock? It could be sold as part of specified undertaking of the unit trust of India (SUUTI) which is the easiest way to get divestment but that has been resisted by the government for so many years now with absolutely no logic to it. Then of course there is always this pre-Budget fear of taxes?A: I would assume it is the later, every year for the last four years the government has raised excise duty on cigarettes quite significantly in the Budget. This year given the scramble for revenues, again the expectation is that the government will raise taxes on cigarettes once again. People have got tired of waiting for a more rational taxation system on tobacco as a whole.The government so far has followed a very narrow policy of just taxing cigarettes and not taxing the rest of tobacco consumption in various forms. So, I guess that is what is playing out at this point in time. Your point on SUUTI sales is absolutely valid. The government requires additional revenue this year that is one way to raise money.Between Hindustan Zinc and three SUUTI owned companies the government has the potential to raise something like Rs 70,000 crore, which can easily address some of the short fall plus any additional spending which needs to be done to revive growth in the economy.