'The government's projections for 2019-2020 will be disappointing big time.'
"Nobody is expecting anything big for the equity markets from the Budget," believes Rusmik Oza, senior vice president and head of fundamental research at Kotak Securities.
In an interview to Rediff.com's Prasanna Zore, Oza says the equity market is not expecting any big-ticket proposal in Finance Minister Nirmala Sitharaman's first Budget, but expects fireworks if it proposes cuts in the long-term and short-term capital gains, lowering of the Securities Transaction Tax, or a one-shot cut in corporate tax structure from 30% to 25%.
What do you think the finance minister will propose on July 5 for the equity markets?
Nobody is expecting anything big for the equity markets from the Budget. The market is still considering the interim budget (for 2019-2020) as a reckoner now.
To a large extent, the expense side (expenditure programme of the government) is known. The income side (receipts) has been a little disappointing for the government.
The government's projections for 2019-2020 will be disappointing big time.
Given the slowdown (in the economy) it will be very challenging for the government to earn more income.
Getting a huge special income from the RBI, or moving a huge chunk of their borrowings to the balance sheet of public sector undertakings, are the only two things that can help provide some relief to the taxpayers.
What measures could give a boost to the equity markets?
If the government cuts the long-term and short-term capital gains tax, or if they lower the STT, or if they cut the corporate tax rate from 30% to 25% in one shot, then the equity markets could get that booster dose. Otherwise, there is nothing much the capital market should expect from this Budget.
I don't think the government can scrap the Long Term Capital Gains as they are already running short of income receipts.
So, it is difficult they will tinker much with LTCG. And since they have introduced it only a year ago, changing it now will put a question mark on the entire policy framework.
So, one should not expect any major change in the capital gains structure.
Do you think that if the finance minister hikes Section 80C limits and tax exemption limits, retail investors would invest the incremental money into the equity markets either directly or via mutual funds?
Any incremental savings will be only marginal if the government were to hike the exemption limit from Rs 2.5 lakh to Rs 3 lakh. That would increase average savings of taxpayers by Rs 2,500 in a year. That money would rather move towards improving consumption or for meeting other day-to-day expenses.
I don't think this hike could bring in any meaningful retail money into the equity markets.
The equity markets, though, has started getting due respect from the retail investors through SIPs (systematic investment plans) already. We are already hitting a monthly SIP run-rate of Rs 8,000 crore, which is roughly $12 billion annual inflow into the equity markets.
A strong equity culture is already being created among the Indian middle class because of SIPs. The average ticket size per SIP is already as low as Rs 2,000 to Rs 3,000.
This has made it convenient for investors to allow auto-debit investments through their bank accounts.
This is far better than paying an EMI for a liability, and here (via SIPs) you are creating an asset (by investing in mutual funds).
What sectors look fundamentally attractive to you pre-Budget and what Budget proposals could make it more attractive to investors?
The housing as well as sectors allied to housing look beaten down. As providing a pucca makaan (housing) to everybody by 2022 is a promise this government is committed to, we think the time is running out for the government.
I think this Budget could offer a lot of sops and incentives to the affordable housing sector and housing loans segment.
This could have a positive impact on the cement, building materials, and housing finance companies whose valuations have been severely beaten down.
These sectors could see a positive bump if the government comes up with a solid roadmap for the housing sector as a whole.
Kickstarting housing will lead to revival of the real estate sector and resolution of non-performing assets in the financial and real estate sector can also be addressed.
Only a few index heavyweights are moving the Nifty and the Sensex. Do you foresee a broad-based rally post Budget?
Not immediately. Since the start of this fiscal year there has been a serious slowdown in a host of sectors. Most of the leading (macro economic) indicators are not showing signs of revival.
Even when the RBI has cut the repo rate by 0.75% till now, banks are yet to transmit these rate cuts (for the entire economy to benefit from it).
The cost of borrowing for NBFCs is still very high today.
I think, budgetary proposals, along with a host of measures that the government is planning to undertake, can revive economic activity in the next two-three months. Post that one can expect a broader recovery in the market.
Our estimate is Nifty is already trading at a rich valuation and so I don't see any re-rating in the Nifty.
Post Budget, our reading is that if there is no major out-of-the-box idea, the markets could see a correction.
The need of the hour is some bit of correction in the Nifty and as the things improve on the ground, as the lead indicators improve, the market could see a broader rally sometime around the festival season beginning September-October. One can then see participation from small- and mid-caps also.
How do you now look at the small- and mid-caps that have been beaten down in the last year?
We would be recommending some of the beaten down names despite their quality.
One needs to make a distinction between bad-quality beaten down names and good-quality beaten down names. The former have been hammered by more than 60% and the latter by around 30% to 40%.
We would feel much more comfortable investing in the second category of quality mid- and small-cap stocks. The reason is their ability to make a strong comeback is very high because they have been beaten down for reasons beyond their fundamentals.
We don't expect companies that have been embroiled with regulatory and auditor-issues to recover. And recovery could be seen only in growth and value companies. Only companies with solid growth projections would be rewarded by the market.