Waiting for Budget to incentivise long-term equity culture: Sameer Narayan : 04-07-2019

I am not saying LTCG will be rolled back but it could be tweaked to the extent that 10% tax would be imposed on holding period of one to three years and beyond three years, it will zero tax, says Sameer Narayan, Market Expert. Excerpts from his interview with ETNOW.

We are just a day away from a budget. We are starting to see a little bit of action in certain pockets, coming in the hope of some announcements there. There is a lot of expectation particularly on the housing side. Are you also looking at that pocket of the market. 

Housing per se is a very large sector from the market perspective because there are a lot of cement, steel, building products and all of them have implications in terms of employment as well as the fact that it does a lot for the rural economy. From that perspective, some housing sops are definitely expected and would be provided because there is some amount of lull happening and the expectation of a 3.4% fiscal deficit may be stuck to given the fact that we have seen a lot of cut on the expenditure side because revenues are not coming in that robustly. 

There has been a decent cut on the expenditure side. So numbers will be met by and large. Now comes the question of believability. Today if a number is put out on indirect taxes of a 15-16% growth, then people have to believe the basic number. That is the key now because all the rims that have been published suggests housing is one. You can also expect a lot of things on long-term capital gains. From the time it was implemented, the market has not done that well. So I do not think there is too much revenue that the exchequers could have expected. What could happen is you could have a tax being put in place for one to three years at 10% and above three years nil. 

Would Budget be just another day?
Well it could be a policy setting for the next five years. 

From a market reaction view point, not from what the finance minister will say.
From market reaction, probably it could become a non-event as such because there is not much that can really come out. There could be something interesting that could be done in terms of the expenditure and where you are going to do it. 

That will have some implications for sectors and industries. But I am not saying LTCG will be rolled back but it could be tweaked to the extent that 10% tax would be imposed on holding period of one to three years and beyond three years, it will zero tax. That way, it will really incentivise long-term equity culture. 

Is the news now changing for better for NBFCs? Every day, we are getting a sense that Dewan Housing will be able to bail out. Either it is going to be in PE investment or some part of different businesses would be sold. The Economic Times today is carrying that Comcast maybe acquiring substantial promoter stake in Zee. ADA is desperately trying to sell their head office to repay their debt. The incremental news flow is getting better. 

Definitely the worst seems to be behind us because we now are having buyers who are showing interest in the underlying assets. That is the first sign of revival that somebody will be there. They are able to price the asset and then put up capital. Once that happens, that interest will start building. When does the growth come back is actually a big question because even today valuations may have corrected quite a bit. But the key variable right noe is how to return to the days of 25-30% loan book growth which you have enjoyed in the last half a decade or so. 

Interest rates will go lower. It could be 50 bps, 75 bps, 100 bps, I do not know but they are going lower. Are these stocks factoring in a decline because these are utilities which do well when we are in a soft interest rate regime. Are markets pricing in all that? 

There are Interesting things happening in the power scene. We are running at almost 60% capacity in thermal PLFs. The total thermal capacity is roughly about 225 gigawatts. If you consider the way power consumption is growing, in another one, one and a half years, you will typically reach a 71%, 70% kind of PLF on the thermal portfolio. 

In 2003, when India had a power shortage, the thermal PLF had hit 70% capacity. So looking at the fact that today you are not seeing any new incremental capacity coming up, we do not see thermal as an interesting theme. India maybe in a situation whereby in next one and a half, two years, you could be looking at power shortage in the country. Assuming we hit our 7.5% GDP growth and we try and power it through the power route, it is a very clear demand driver which is a huge tailwind for the sector as such.

In terms of valuation, in a soft interest rate regime, these companies stocks tend to do better but I think apart from that there is a larger underlying thesis of the demand side that is right now not getting priced in because still these stocks are still available at 1-1.5 times book at a 12-15% ROE. That is where the growth element lies and the moment market starts getting comfortable about growth being available. 

Do you revisit some of these stocks which are sitting at solid multi-year highs– Bajaj Finance, Titan, HDFC BankNSE -0.21 %? Has the time come to even revisit some of these names?
From a valuation perspective, yes but the fact is only if something looks cheaper and the earnings growth looks more believable, you revisit the expensive names. 

But Cummins maybe an interesting play because today the parent is definitely showing interest as well as commitment. The power story is just evolving and with the manufacturing growth at 3% for last financial year, you need to fix manufacturing because that is where jobs will come in and GDP growth will be. There is a very strong underlying thesis for Cummins on underlying demand basis. I would be watching for a policy reform in budget to be able to fix this. 

Source : Economic Times

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