Interview with Arun Thukral, MD & CEO of Axis Securities
GST is a structural reform and is expected to accelerate the pace of GDP growth of India post its implementation, Arun Thukral, MD & CEO, Axis Securities, said in an exclusive interview with Kshitij Anand of Moneycontrol.
“We feel consumables like FMCG, dairy industry, capital goods, logistics, warehousing sector as well as power sector is likely to benefit the most,” he said.
Q) What are your comments on GST rates? Impact on economy, markets etc.
The fitment of goods in the GST has been welcome — around 80 percent of the goods will attract 18 percent or less GST against 35 percent of currently taxed at 27 percent or higher. Effectively, the ushering in of GST will help reduce the prices for the end user.
The articles of daily usage including milk, food grains have been exempt from taxation under GST regime making it easier on the pocket of common man. This will also push for higher consumption as it would be in reach of a broader population.
From whatever fitment of goods happened so far, the consumption sector is a big beneficiary and FMCG is a clear winner. The markets have more than welcomed the new rates under GST regime. GST is a structural reform and is expected to accelerate the pace of GDP growth of India post implementation.
Q) Top 3-5 sectors which you think could impact positively on GST rates and should be on investors' radar.
The biggest beneficiary of the GST implementation would be the sectors that have a high share of the unorganized segment as the market share will swing from unorganized players to organized ones. Overall, GST will bring about lower tax incidence, reduction in logistics costs, higher compliance etc.
We feel consumables like FMCG, dairy industry would largely benefit; logistics and warehousing sector would benefit both qualitatively and quantitatively as the time spent on the state borders drops thus saving both fuel and time to reach the destination. Small cars will get slightly costlier, while the SUVs will attract an additional cess.
The power sector will gain as the rate for thermal coal has been categorized under 5% vs 11.7% earlier. It will help reduce the final tariff which would be finally passed o to the end consumers. Capital goods put in 18% rate slab would lead to a reduction in power project development cost.
Q: The current theme that is going on, 1,000 days of Modi Government and your views on that and how it has performed on a scale of 1-10?
Well, we would be talking about the initiatives taken by the government over the last three years. So, let us start by looking into one by one. One of the areas which the government has tried to address is the infrastructure. No country can progress if the infrastructure is poor; infrastructure has to be the best quality whether you look at China or other emerging countries, once they started growing, infrastructure was their first priority.
So, between 2009 and 2014, the road construction progress was tepid, only 6 km to 9 km per day was the maximum run rate. Between, 2015-2016 and 2016-2017, it started improving and the latest in 2017 it went to around 22 km of road per day, although they had an ambitious target of around 40-41 km. 22 km per day is also great and the seriousness can be seen in the allocations made to infrastructure sector in last 2 budgets.
Whether you look at this year’s Budget or the last year’s Budget, there has been a massive allocation for the infrastructure sector. In 2017 budget, Rs 3.96 lakh cr were allocated for the infrastructure sector, in general. Allocations of Rs 2.4 lakh crore for roads, railways, and ports were made in 2017-18, out of which Rs 1.31 lakh cr were set aside exclusively for Railways. So, that is a great achievement.
And in roads segment, they started with hybrid annuity where the government takes 40 percent of the cost and developer-investor shoulders remaining 60 percent, which is working well. If you look at Infrastructure on the broader term, we can get into housing for all or affordable housing which is also going to be a great theme ahead.
It is also going to benefit the different sectors like cement, steel, ancillary industries and also create jobs both skilled and unskilled. It is going to be a great scheme, which we can say would be one of the achievements of the Government in future.
Another major achievement of the Govt. is financial inclusion using the Jan Dhan-Adhaar-Mobile (JAM) trinity. Around 27-28 crore accounts are now opened. Though there were issues during demonetization, these accounts have helped people develop banking habit.
Around 90 percent of India's population are now covered under Adhaar which is a great achievement. Adhaar was a brainchild of the previous government and the current government has capitalized on it.
So, this is another positive thing that whatever was there in the earlier government and whatever they could use in a better way, they have adopted that whether it was Adhaar or even schemes like Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) where they did not come out with any new schemes superseding it but strengthened the old schemes.
Using the JAM trinity, the government has devised the direct benefit transfer, which has been quite successful. So far, around Rs. 75,000 crore has been transferred to around 33 crore beneficiaries under 132 schemes.
That is a great achievement since earlier the subsidy leakage was happening. Now, at least it is reaching the intended beneficiary. As the money is deposited directly in the bank account and at some point of time, it will start coming to the financial savings. Thus it is properly channelized now.
Q: Any number that you have for the government, 1-10, 10 being the best?
A major step taken by the government was demonetization. When we talk about a company, we check for three things in a promoter. The promoter has to have integrity, the promoter should have energy and promoter should have intelligence.
Similarly, if you look at this government, I find all these three virtues - integrity wise, we have not seen any scams over last 3 years. If you look for energy, there is some action, some reform every other day.
And if you look for intelligence, you come across many steps taken by this government which was not even thought about earlier. Demonetization was an intelligent step to attack the black money & the parallel economy.
Demonetization had issues for initial 2-3 months, but finally, everything settled down. If you want to look for benefits, we can see that more taxpayers and money has come to the tax net, the parallel economy has been affected and we are moving towards less cash society.
Obviously, the numbers have not gone up sharply but going ahead, more people are going to pay taxes and the tax to gross domestic product (GDP) ratio would improve. And that ultimately may help to reduce taxes in long run.
Apart from that, on the banking financial services and insurance (BFSI) segment, the insolvency and bankruptcy code, which was passed last year, would offer a time bound resolution for individuals and companies that failed. You will have a resolution plan within 180 days and secured creditors will get credited.
And now, with the latest ordinance, the government has equipped the RBI to take a call on the assets. This development is going to address the non-performing asset (NPA) problem to a great extent.
Another major development is the implementation of Goods and Services tax (GST). There are 13 different taxes and a lot of clauses associated with them. A businessman's main time goes into compliance, how to handle these taxes.
Now all these taxes are going to be subsumed in GST thus saving time and energy for the businesses. Wherever GST has been implemented in the world, we have seen an addition of 100-150 basis point in the GDP numbers over 18 to 24 months. That is why we call it a reform of the decade.
Another big initiative made by the government is Make in India. The entire world is trying to be the protectionist and entire world is trying to protect jobs for their local people, whether it is Brexit or Donald Trump talking 'Buy American, Hire American'.
What India is doing is the reverse. India is actually inviting people to come here and Make in India. Whether it is a global auto hub being set up in India or textiles where we are going to be more competitive than our neighbors, we are going in a positive direction and wherever efficiencies are, we are attracting those efficiencies.
The government is spending money on Skilling India because if there is a reasonably skilled labor available, more and more companies will come and make in India and availability of skilled labor will help.
So, these are the major things which I could recall. So, this is going to help the country and economy in long run. Going forward, there would be some more reforms, may be land reforms and labour reforms.
But so far, things are progressing on expected lines. Now, you want to rate so, I will give the Government around 8.5-9 because more or less, they are doing good work.
Q: Like we discussed earlier, markets are on steroids. Does the valuation scare you right now?
If you look at FY18 and factor around 15 percent growth, then the price-earnings ratio (P/E) is around 18 times, which is fairly valued. But, we are being slightly cautious. Primarily a retail investor sometimes gets over excited, at that time we tell them not to borrow and invest.
Since we have found that equity is under-represented in the retail investor's portfolio, we advise them to invest using the systematic investment plan (SIP) route. Now, SIP can be in a Mutual Fund or it can be in a stock.
Overall, if you look at the direction of the market, there is a limited downside. There is huge liquidity available. So even if the market falls a little bit, there is huge money, maybe Rs 50,000-60,000 crore lying with Mutual Funds ready for deployment. EPFO will also be investing around Rs 18,000 crore which is around 15 percent of the incremental inflows.
So, there is huge money which is waiting in sidelines to get into the market. Another beautiful thing which has happened is that Indians are investing in Mutual funds using SIP route.
The SIPs are attracting around Rs 4,000 crore per month. So, for the first time, we have seen the independence from the dependence on Foreign Institutional Investors (FII) flows. We were worried about FII flows, post demonetization. FIIs were sellers for 2-3 months post demonetization, but DII invested huge money.
So, that is a great comfort to the Indian investor and Indian markets because if one segment is not putting money, the other segment is putting. Now again FIIs have started putting money. So, this calendar year, they have already put more than USD 6 billion.
Now, monsoon prediction also has been good; the worry about El Nino has been easing. And yesterday, we saw the CPI inflation number reported at 2.99 for Apr.’17. Lately, there were some worries whether the rate cut will happen; some people had even started talking about monetary tightening. But at least now, it has given comfort that inflation has been under control.
The markets are doing well but chances of correction cannot be ruled out. The market is expecting that US Fed is going to increase Fed Fund rates by 25 basis points in June. Still if there is any correction, one should get into and accumulate at the lower levels. One has to be ready with the shopping list.
But you have to accumulate at dips and smaller quantities; you have to stagger your investment because the market is heating up. The correction may come, may be due to some geopolitical tension like saying Korea or domestic development, maybe GST rollout as there is the likelihood of few teething problems given that it is a completely new tax regime.
One should use this kind of opportunities. I always call them opportunities, because last year whether it was the surgical strike or the Donald Trump victory or demonetization days, your stocks were available at 10 percent or 5 percent cheaper. And people who were ready with the money benefitted out of that.
We are very positive on Infrastructure sector, companies operating in EPC space with the light balance sheet. We are also bullish on consumption space. Last year, the people were not able to spend the Seventh Pay Commission money or the good monsoon proceeds.
The rural spending was to happen, but then the demonetization prevented the spending. The purchasing, which has not happened earlier, is going to get converted in near future. If you look at the recent numbers, we are very positive about the FMCG space or consumer durable or consumer discretionary. Housing for all, is a huge opportunity.
There are lots of opportunities in housing finance companies and ancillary companies, like cement, lighting company, sanitary ware etc. Apart from that, we are very positive on auto and auto ancillaries, because auto ancillaries have an added advantage that they not only supply to the listed auto players in the country, they also supply to other players like Hyundai or Honda.
Many of these global majors have set up their major hubs in India. So, these companies are going to benefit from the rising demand. And there is a huge export potential for these players who are making in India and exporting.
Q. So these are sectors that are likely to gain traction probably in the next two years of the Modi Government?
Q: And apart from that, will you be comfortable in giving out levels of Sensex or Nifty?
No. What we say that instead of looking at the level, one should be investing for long-term and look at the opportunities and look at quality sectors and quality stocks.
Q: IT sector is on everybody's mind because of the various things that is going on. What is your call on the IT sector?
Obviously, we are cautious on IT. All these H1B visa issues are there. But one thing I also believe that if the US is doing well which is a fact and that is why the policy rate have been increased, the Budgets for IT will also increase for major companies. So, that money, that job has to come to Indian companies because we are one of the better players or better equipped to handle IT jobs.
So, I personally feel that this also will give some support to IT sector and there is not much downside as such. But yes, we are cautious as of now on IT because of all these factors.
Q: Any last advice you want to give to your investors when market trade at a record high?
We always tell our investors that if you are a retail investor and if you under-own equity, please invest your surplus money in equity and preferably take a SIP route whether it is a Mutual Fund SIP or a stock SIP. But participate in India growth story over the years. Now India is doing so quite well. Earlier crude was trading very high, there was no stable government, interest rates were high and the fiscal deficit was not in control.
Now all these macro factors are in our favour. The monsoon is also expected to be good. Only 3-4 percent people invest in equity. Hence, we advise our clients to invest in equity, but in a staggered manner.
Q: Any percentage that you have from 3-4 percent? Any specific percentage probably the industry is targeting to achieve?
No, what I am saying is only 3-4 percent in India invest in equity whereas, in any developed country, it is in double digits. In China it is around 18-20 percent, the US it is around 25-30 percent. So in developed countries, more people are familiar with equity as an asset class.
What I am saying is that Indian retail investors should know more about equity, do their own research. If they cannot research, they should go to a financial advisor, but do not ignore equity as an asset class. You should not because if you are ignoring equity, it is a bigger risk.If you are investing in fixed deposits or putting your money in normal accounts, you would not even able to beat inflation. So, that way, one has to put money in financial assets and within financial assets make a good allocation for equity to participate in India growth story and to earn better returns over a period of time.LIVE NOW... Video series on How to Double Your Monthly Income... where Rahul Shah, Ex-Swiss Investment Banker and one of India's leading experts on wealth building, reveals his secret strategies for the first time ever. Register here to watch it for FREE.