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Union Budget 2017: Best budget is do not change anything, do no harm, implement well
February, 01st 2017

What is your sense – will you whistle in the dark or shoot in the dark?

I do not know. This year’s budget is very unique in a sense of the backdrop which has been created. The Brexit happened four-five months back, Trump presidency has happened. These are things which are going to redefine for sure and then the immediate elections which are there. So all of these things and the big demonetisation which is what we are still recovering from. I would definitely like to see how exactly this finance minister straddles through. The aspirations of the people at the upper end from the business and corporate side and on the other side how do you balance the needs and pulls of one of the pyramid because right now the world has been run by bottom of the pyramid. It is a new trend, new political compulsion or whatever you can say that is ruling. All this will reflect in the budget making right now.

What could markets happy? Three things that the markets will focus on which will please the market or derail this amazing pre-budget rally that we have seen?

Two-three things. On expected lines, what is the timetable for corporate tax cut?

Do you think markets would be happy if get a sense that from FY18, the tax rate could be cut by at least 2%? Is that 2% important?

The market is a wonderful machine which can discount the entire future, forget two-three years. Two-three years is nothing. So, in my spreadsheet, next year’s profit of all the companies will change the moment you say that this time 30% is 27.5% and year after that it will be 25%. That can make a huge difference.

Second is dividend distribution, we have talked about it so many time. It is triple taxation. I have no suggestions for them to do what they want to do because it is a very sensitive subject and it is believed that the rich must pay more. I respect that people must pay more taxes but it distorts the capital allocation in the corporate world. So are they going to look at it if at all? I do not expect anything. What will really excite the market is dividend distribution which is going to be very long-term impact. I mean not only the corporates but actually the shareholders will be very excited as well. In any case, they are very excited to invest in the market but this can actually give a booster. Second is corporate tax and then third and there is so much discussion about long-term capital gains tax. If they do not do anything that will be the best because there are so many changes. The best budget is where there is no provisions at all.

Best budget is that do not change anything, do no harm, just remain status quo.

And implement well.

All of us are working with the assumption that the corporate recovery will happen. The corporate recovery is getting delayed and now it appears that on the investment side it could get delayed by another two-three quarters. What can this budget do to ensure that external pressures are minimised because IT and pharma will not be firing full cylinders. Demonetisation will have impact on consumption. The only thing you can control is now government expenditure and the revival of investment cycle or earnings which has not be taken off.

But the government has limited role to play on that count in the sense that for doing anything in economy, you need two things: one is the money, that comes from the taxes. Tax to GDP is very stuck.

The economy itself is slowing down or it is at 6.5-7%. So the amount of money in the hand of the government is very limited. Now the best thing government can do is the power of the sovereign, making the business life easier, the ease of doing business which has been extremely well, this government has taken right from beginning to ease the business doing environment and the entrepreneurs are wonderful community, they will create the jobs, they will create the economic miracle.

No country is built with a complete strife between business and the government so you have to bring somehow the trust between the business and the government and work together.

What can the FM do for various sectors? There is talk that there is going to be introduction of a scrappage policy for vehicles over ten years old. That could be a big boost for the likes of a Bosch or for that matter Ashok Leyland as well. Are these themes that investors should look at right now?

Obviously.What are the specific, industry specific provisions they come out with which has been represented by the respective associations that of course will come in bits and pieces but the big thing is strategically how do you… see the real smartness of a finance minister or government is to straddle the deficiency of the resources and go for the big one. Take for example, PSU banks, How will he solve it?

So how do you think he would?

I do not know. We are here. In next one hour you will come to know. So that is a big subject because your banking system has to be healthy, at least 70% of the bank system…

Do you think there is tailwind for HFCs?

Yes, see like IT has headwind. They had 20 years tailwind. Now it is headwinded and regulatory headwind, now I am not saying anything but HFCs have the regulatory wise and the demand wise from every aspect of it rate cost is lower, your demand is very, very long-term demand. There is a very healthy competition, very healthy regulator so I think it is a very unique opportunity.

The banking numbers do not inspire too much confidence. Private corporate banks are suffering like Axis Bank, ICICI Bank. What is going on with some of these so called A grade private banks?

Any bank which had very large corporate exposure, particularly large corporate exposures across the industries are suffering. The phenomena with which PSU banks were suffering very clearly, They are not only exposed to that particular segment, they got exposed very badly to that segment.

Even if you are very judicious and you work with a lot of caution because of the exposure to that particular segment, you are suffering from that particular phenomenon. One of the biggest reforms you should be looking at is what the FM does for the entire banking system, more particularly for recapitalisation or revival of PSU banks because that is backbone of the economy. We definitely need this.

I want to mark IndiGo as a stock and when we say IndiGo the man to look to is always Raamdeo Agrawal. I am not going to get into stock specific comment but what amazes me about the Indian airline sector is the sector is growing, the sector is growing at 20% which means rule of 72, it doubles in about 2.5 years. Everything is going in favour of airline sector but where are the numbers?

Stunning. I mean 42% of volume growth, 15% yield decline…

Is there something which we do not understand about the way Indian aviation is working?

I think that the first year profits with 15% net margins is the culprit. The industry is trying to set it much lower to may be single digit 8-9% because 15% is not sustainable because the whole lot of competition will come in, unhealthy competition will come in. There is a very deliberate attempt by the management to execute it flawlessly but bring down the net margin to more like 8-9%.

If long-term definition is changed from one year to two years, it will be applicable to PMS schemes and mutual funds as well. Is that a deterrent for someone who is here for a year, maybe for one-and-a-half year and could that change the cost of transaction, cost of capital for mutual funds?

Mutual fund does not get impacted because mutual fund is protected from all sorts of taxation. If you are holding mutual fund for than a year, in that case you are protected from the capital gains on mutual fund units also.

Will that become true?

I do not… see one of the things is that stocks do not know who owns it and what is the tax structure. So if stock price is determined irrespective of what are the capital gains norms….

Trust me we at ET Now know that who are the good investors and what stocks they own so at least I can assure you on that at least.

Yes so clearly if you are looking at say price of Reliance or HDFC or HDFC Bank, you are not going to ask what is the long-term capital gains tax. It has nothing to do with that. What is earnings? What is earnings growth, what are the discounting, how long this earnings are going to continue, those are the factors which are important. So, of course, there can be knee-jerk reaction because are they going to allow it for everybody who bought it earlier so called grandfather, for the people who bought it till date will it be one year long-term capital gains tax and the retrospective or forward so those are the issues which might determine some amount of selling but the guys who are buying or selling they will again come back to buy. Net-net, on a month basis it does not really matter.

 
 
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