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India can give better tax-adjusted returns vis-a-vis other EMs
May, 16th 2016

Vikas Khemani, president and chief executive officer, Edelweiss Securities, tells Puneet Wadhwa the changed tax treaty with Mauritius will not materially impact long-term flows. Edited excerpts:

What is your interpretation of the India- Mauritius tax protocol? Will it severely dent flows into India?

The government has addressed several issues at one stroke. First, it has signalled that it is fully committed to a key election promise, of effective steps to curb black money. Second, unlike previous regimes, this government has correctly gauged that the biggest issue with investors was never of keeping tax exemptions but better clarity on the taxation policy. While the finance ministry has clearly sent out a strong message to foreign investors on its intent about clarity in taxation policy, it has also ensured they get sufficient time to plan.

Third, this ends the differential tax treatment between domestic and foreign investors. We believe long-term capital inflows will not be materially impacted, as the Indian economy can still provide better tax adjusted returns vis-a-vis other emerging markets (EMs).

How do you see the markets in CY16?

We have seen a single-digit percentage rise since May 2014, after which many macro improvements have taken place. Historically, the bedrock of a long-term bull market lies in macro factors such as falling interest rates, low inflation, government reforms, productivity growth, capital formation and demand growth. However, today, despite some or most of these factors falling into place, the markets are still languishing. This cannot sustain for long if, structurally, things are moving in the right direction. Macro to micro will happen sooner than later. International risks - be it China or the European economies - are not going away and will keep surfacing in one form or other.

Do you see any signs of a revival in demand in the March quarter results?

There are some signs of recovery, though not broad-based, visible in the March quarter results so far. Cement volumes have clocked double-digit growth so far and two-wheeler volumes are also improving. Credit growth in some private banks has been very robust, while some are still struggling with asset quality.

The key thing to watch is volume-led growth. We can see green shoots currently but we need to be more patient for the results to manifest themselves. Going ahead, if things stabilise globally, one should expect better earnings growth in FY17, compared to FY16.

What has been your investment strategy thus far in CY16?

I am a big believer in long-term wealth creation. Hence, such sharp corrections offer an excellent opportunity for accumulating good quality stocks from a long-term perspective. Companies in the capital goods, EPC (engineering, procurement and construction), banking, housing finance, oil marketing, fertiliser and chemicals space offer fairly attractive investment opportunities from a three- to five-year perspective.

Is the low commodity price era over for now? What is the outlook, then, for capital goods, automobile and metal stocks in this backdrop?

It seems commodity prices have bottomed out. However, a structural rebound in these is unlikely anytime soon. One might see some short-term bounce-back rallies. Globally, large excess capacity is still there, especially in China, and global growth is running below par and might continue to do so for some time. I remain positive on the capital goods and automobile sectors, as these are linked to domestic recovery.

Are the stock prices of public sector banks (PSBs) factoring in the worst?

Banks which do not carry the burden of asset quality will do very well in the next three to four quarters. The others will pick up as and when asset quality resolution takes place. Banking sector, in general, will do well. We believe investors are overestimating stress and most private banks (ICICI, Axis) and large PSBs (State Bank of India, Bank of Baroda) will scrape through without capital calls. On the other hand, we are cautious on mid-size PSBs, despite optically favourable valuations, given the capital constraints and growth differentiation.

How serious a threat is Patanjali to the listed fast-moving consumer goods (FMCG) companies? Will the next two years see FMCG stocks getting de-rated?

Patanjali is an innovative disruption to the FMCG business model. Instead of looking at Patanjali only as a serious threat to consumer companies, we look at it as increasing the overall pie of the natural/ayurveda market. It has brought back to life the essence of natural/ ayurveda.

There will be some impact on some categories where Patanjali is present. Most consumer companies trade at fairly rich valuations, which I do believe is also due to a scarcity premium. There is a possibility that these companies might get de-rated as other sectors deliver earnings growth.

Do you see investors’ appetite for follow-on offers (FPOs) / initial public offers (IPOs) picking up in the second half of CY16? Which themes, according to you, are likely to do well?

The IPO pipeline is very strong. You will see lot more IPOs hitting the market this year. Currently, there are 15-16 companies holding valid SEBI cards and planning to raise around Rs 10,000 crore funds between them. Moreover, there are another seven – eight companies awaiting SEBI approval, which are looking at raising around Rs 6,000 crore. Many more players are working towards filing their IPO documents. I think BFSI, healthcare, consumer and IT will be the big themes for IPOs in the second half of FY16.

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