Upbeat on India; aviation to become profitable: IDFC Sec

The recent measures taken by the government will help build a strong foundation for the future believes Nikhil Vora, MD & Head-Research, IDFC Securities. So he is no longer bearish or negative on India.

“My sense is that the last one year of hyperactivity which this government has shown, will only be further accelerated with whichever form the government comes in over the next one year,” says Vora in an interview to CNBC-TV18.

For example, Direct Cash Transfers initiative could potentially help root out corruption and could hlep us save close to Rs 50,000-60,000 crore 4-5 years down the line.

Similarly, if Direct Taxes Code (DTC) and Goods and Services Tax (GST) is implement it will add about 100 basis points to gross domestic product (100 bps) and will possibly increase tax to GDP collection steeply upwards, from current 11 percent, adds Vora

According to him as we look at recapitalisation of aviation in India, one could potentially see around USD 2-3 billion of capital coming in through FDI route. This would not only make the space competitive but also profitable going forward.

Also read: 2014 will be a year for stock markets, says Credit Suisse

Below is the verbatim transcript of his interview on CNBC-TV18

Q: The markets have already run up a significant bit, 6009. We have that very interesting report on green shoots and a very interesting example that seeds sown now a bamboo shoot is only going to mature in four years, extremely well written report but really what is the approach you are taking right now? Valuations are standing very tall well above 14 times, are you a buyer now at all?

A: Yashwant Sinha said as a country we party too soon. Ironically,I think we don't party at all. The fact is that as we have documented in our work released couple of days back – It is a classical Chinese bamboo story that you are doing lot of things on ground; there is lot of seeding which is happening. It is not visible on the surface but it takes that three-four years period before it becomes entrenched in the system. So, you are making the ground root very strong. Therefore, possibly at some stage, could happen in the next year, could happen a year later but that is the time when you have the makings of an extremely solid foundation and which cannot get shaken over the next few years or few decades. My sense is that we are on that verge.

It is extremely heartening also to note what Yashwant Sinha talked about. Assuming that there are only two potential governments which will come into power, I think the Congress or the BJP, the fact is that everyone is talking the same language. No one is really against the approach of the current government. Although there may be semantic issues but fundamentally everyone is on the same page.

My sense is that the last one year of hyperactivity which this government has shown, will only be further accelerated with whichever form the government comes in over the next one year.

I am extremely enthused over what happened in the recent past and let me take three-four cues to really talk on. First, the direct cash transfers -  has become pretty much the most critical subject in India right now. The fact is that all of us now are pretty much on the same page believing that the moment we are able to implement this completely across India, you could literally route out corruption where it really starts off. You could actually start to built-in or pay out directly to the users. So, one is looking at close to Rs 50,000-60,000 crore of potential savings happening because of direct cash transfers, may be four-five years out but something which is very visible.

We are looking at potential implementation of Direct Taxes Code (DTC) and Goods and Services Tax (GST) and our sense is that it adds at least 100 bps to your GDP. It possibly will increase your tax to GDP collection steeply upwards from the current 11 percent that we are at today. This creates systematic audit of tax compliance into the entire country be it on personal taxation or on goods and services.

There has been too much of noise which has been made about what happened to Wal-Mart and their decision to part way and so on. Prima facie the fact that all the opening up that the government has done in recent times - the fact is that each of the sectors that the government has opened up, potentially can create as much Foreign Direct Investment (FDI) into that space as the entire country gets today. So, FDI in China which is extremely restricted, they get closer to USD 30 billion FDI in retail. India composite FDI is around USD 20 billion right now.

There are challenges and there will be compromises as government move forward but at least the fact that we moved ahead with those policies is extremely encouraging.
Therefore are lot more positive tangible benefits that one should look at the margin than what they were earlier.

Moreover, for the first time we were starting to see demand shrink in oil, which has not happened for ages. This shows that the actual impact of increase in prices is starting to look at demand receding out be it in gold, oil and so on. I think that is brilliant, it will give further ammunition to the government to continue to follow the course that they have been doing and possibly help the next government also do the same.

I am not bearish, not negative as much as I used to be historically. Benefits of all these measures are something which is quite related to what happened in 1991, it gave you a 20 year up-shoot in the Indian markets and that is possibly the trend that one is looking at.

Q: We have seen definitely more participation coming in now in airlines and perhaps people with slightly deeper pockets. How will you approach the listed shares, are they in your buy list at all?

A: It is impressive to look at the fact that everywhere in the world, aviation capitalisation as far as balance sheet is concerned is anywhere from USD 10-20 billion. In India, it is significantly lower and most of that capital has been wiped out. So as we look at recapitalization of aviation in India, you could potentially look at least USD 2-3 billion of capital coming in through FDI route in India over a period of time and you have started to see the first wave of that happening. Post the Etihad transaction we are looking at Singapore Airline looking at it, AirAsia, may be Qatar and so on.

This is a market which is just about opening up. It will become more competitive over the next few years but possibly will also become profitable which was not the case earlier. So this is a market which will see lot of dynamism as we move forward.