- 7/23/2024
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00:00Mahir Vora, CIO Trust Mutual Fund, Andrew Holland of Avendus Capital Public Markets
00:05with us on the show. Gentlemen, both of you, thanks so much for taking the time out. Mahir,
00:10I will start with you first. What is it that you believe would be the cornerstone announcement
00:19in this budget? Would it be around the FIS deficit glide path which probably is a given
00:27or could they better it or could it be something around CapEx announcements or consumption?
00:34Hi, good morning. See, the good thing is that the finance minister has enough levers
00:42to tweak around the numbers if she wants to focus on any priority. For example,
00:50there is enough if you want to increase CapEx, there is enough lever available if you want to
00:55increase the rural support because there has been a little bit of acknowledgement of the fact that
01:00the rural economy recovery has not been as great and we have also seen some states going in for
01:07measures to help the rural population. So, as I said, there will be different focus areas.
01:14The economic survey also provides a few pointers. As you rightly mentioned, CapEx is important but
01:21I think the economic survey kind of alluded to the fact that the government has done its bit
01:26and it's now for the private sector to start chipping in as far as the CapEx is concerned
01:31and job creation is concerned. So, I'm hoping that there might be some encouraging signals for
01:36the private sector to further create more jobs and put in money into the
01:43industrialization of the country, as you know, including Atma Nirbhata etc. So, that's one
01:47focus area. Second is the rural, I think we may see some more spending not necessarily
01:54as direct subsidies but on areas like rural housing, on areas like minimum job
02:00guarantees etc. That is possible and the good thing is, as I said, there is the RBI dividend
02:06as a leeway, tax collections are better than expected, nominal GDP growth is likely to be higher than
02:11what they estimated in the interim budget. So, there are lots of places where
02:17there is additional resources available to juggle these different priorities.
02:22Okay, Andrew also with us this morning, Andrew Holland of Avengers Capital. Very good morning
02:27to you, Andrew. So, on the scale of anticipation, are you hot, cold or just right,
02:37medium? What are you expecting out of the budget in terms of anything that is really going to move
02:44the marker or, like we've been saying this morning, more of the same? And do you think
02:48there will be a resurgence in those typical budget stocks that people have really not been looking at?
02:55So, Tamana, I agree with you, with your more of the same. That's really what the market wants
03:02and therefore the kind of themes that we talked about previously, you know, where it's hospitality,
03:07premiumisation of beverages, you know, infrastructure spending, renewable energy,
03:13all of those, you know, defence sectors will all continue to do well. But, you know,
03:18you've got to ask yourself, is it priced in? And, you know, if it's more of the same, you might have,
03:25you know, a bit of a rally if there's no tax changes. But, you know, given RBI noises,
03:33SEBI noises and the economic survey, either they can talk the problem or they do something about it.
03:41It feels to me as though they might want to do something about it in terms of, you know,
03:47moving money back to the banks because, you know, you can't fund all the expenditure. You're talking
03:52about private capex picking up. You've got to have the banking sector in a position to be able to do
03:57that. And if they're finding that their pressure on margins is there because they can't get enough
04:04deposits, it's going to slow down the growth of the economy. So, that would be the negative,
04:11I think, if they follow through on their words. Okay. By the way, news flashes about Asian paints
04:18are raising prices again. So, just in between this macro conversation, keep that in mind.
04:23Second price hike in probably 15, 20 days. So, the paint companies are certainly going out there.
04:29Andrew, so if it's more of the same, would you be happy with all the measures announced in the
04:40interim budget? Or would you, what are the changes that you're watching out for? Because
04:45between the interim budget and this budget, there's this RBI bonanza that has come the government's
04:51way. They'll do something with that money. True. And I think that they can increase the
04:59capex themselves, which would be fine. They can put more towards rural expenditure. I think
05:06housing would be an area which I think they should focus in on because it has multiplier
05:11effects across many different industries in that respect. So, that would be where I'd see
05:17some incremental kind of expenditure from the government. But, you know, fiscally prudent is
05:23what they have to be as well. So, I don't think they want to kind of throw everything into
05:29expenditure. And I think what they really need to kind of focus in on is getting the rural economy
05:36going. I think housing is going to be one of it. But, you know, yes, it can increase the capex,
05:41but I don't think it has that material impact on the markets overall. I think that the problem
05:48for the market at the moment is priced in everything apart from any tax changes.
05:54Be a negative. Okay, interesting. Mihir, some numbers here. Receipts versus expenditure, right?
06:00So, and let me try and focus on receipts. The indirect tax collections have been very robust
06:06thus far. But if indeed there is a cool-off in corporate activity and the tax collections go down
06:14over the course of the year, what is it that the government can do on the receipts side
06:21to try and shore this up? Because we know that this government is not necessarily very keen
06:26on divesting state-owned enterprises, maybe individual assets but not enterprises.
06:31Where do you think the numbers will be watched out for on the receipts side?
06:37See, first of all, the probability of corporate tax collections not meeting the full-year budget
06:44target is quite low, I would say. A couple of reasons. One is that in the incoming budget,
06:51they've only assumed about 10% nominal GDP growth rate. We are already, you know,
06:56closer to 11, 11.5. So, there is, you know, an upside potential there. Second is that corporate
07:03tax collections are no longer the largest of direct taxes anymore. Personal taxes are actually
07:12more than income tax, personal income taxes are more than the corporate tax collections.
07:16And those tend to be less cyclical than the corporate taxes. So, I think, you know,
07:22even if corporate taxes were to not grow at a rate assumed in the interim budget,
07:28I think there's enough leeway on that. So, you know, I would not be too worried on that front.
07:33You know, Mihir, just talking about the corporate tax, one of the key demands coming in constantly
07:39has been to retain the corporate tax rates at 15%. And the counter in that debate has been
07:47that have corporates actually created jobs, increased manufacturing, increased capex with
07:53all of that lower tax rate given, or did they use it to line up profitability? And that,
08:00of course, is a broader debate. But speaking about that, do you think that on the corporate
08:06side, what would you be looking at in terms of that boost to private capex and manufacturing,
08:12and how key does that become? So, I think the economic survey gives some answers. It clearly
08:20mentions that the government has done a lot of heavy lifting for capex in the last three years,
08:26and the private sector now does need to chip in. And as you rightly mentioned, the economic survey
08:31also points to the fact that corporate profitability has gone up substantially,
08:36but most of the investments are lagging, so to say. So, I think from the corporate point of view,
08:42two things need to be done. And the first one is also one part of the economic survey which I read,
08:48is that while we have improved the ease of doing business versus our own history,
08:55there is a lot that needs to be done in terms of absolute ease of doing business. So,
09:00whether it's in terms of approvals or tax confusions, et cetera, businesses still
09:06need to feel more confident about how they are going to go about doing business in India. So,
09:11I think tax is not going to be a tool to encourage or board the business investments anymore,
09:20because we are already at quite reasonable levels. There's no space for cutting taxes
09:24anymore. However, one should expect more on the PLI, because the production link incentive scheme
09:31has been successful. They tried it in a few sectors with good success, and the government
09:37has been quite open-ended about it and open-minded about it, to the extent that more and more sectors
09:42are included in the PLI schemes. The economic survey points to the fact that we need to create
09:4980 lakh jobs a year from now till the next 10-15 years, given our demographics, et cetera,
09:56and manufacturing can be the only way to go. Manufacturing, construction, real estate,
10:01and labour-intensive industries are the only way we can create 80 lakh jobs. It can't happen in
10:06services alone. So, to that extent, I would expect more trust and more focus on PLI schemes and the
10:12make-in-India or Aakma Nirbhadra 3. I'm going to depart for a second away from the budget,
10:19even though we're 45 minutes out of the announcement. And, Andrew, I want to come to
10:23you first on this, and then Mihira, I'll get your view as well, on what we've been seeing so far on
10:27Q1, because after the budget excitement is done and dusted, we'll see a lot of plans for the next
10:32several years, some allocations tinkering here and there. What we're left with in terms of solid,
10:38factual evidence of what's happening with profitability are the numbers. Andrew,
10:43would it be fair to say that Q1 so far, apart from a few exceptions, and I think IT is the outlier,
10:50has not been the best performing or on par with Street's expectations?
10:58I would agree. I mean, it's been lacklustre. If anything, I'm seeing earnings below expectations,
11:05below the market expectations, and therefore you're seeing some cut in earnings. So,
11:12you know, let's just take the budget out of the picture. You know, whether it goes up or down is
11:17material for afterwards. We go back to the fundamentals, and the earnings is not supporting
11:22the market valuations at the moment. And our view has been that, you know, we'll probably see
11:28something like 15% earnings growth this year, and maybe the market would move up in line with that.
11:34And the market's already up 10% this year. So, you've really got little to play for
11:39in the next six months, unless two things happen. One, the government increases CAPEX,
11:45and those orders go up very quickly, and our private CAPEX picks up. Because that does have
11:50a multiplier effect, and that would probably mean that earnings can be upgraded in the first part of,
11:56you know, 2020-25, and that would keep the market going towards the second half of the year. But
12:03without that, there's very little to get you excited about the market in terms of earnings
12:10growth, given the first quarter so far. Mahir, same question to you. All said and
12:16done, at the end of the day, Q1 has been a little lacklustre, to quote Andrew.
12:22Yes, even in IT, I would say that, you know, while they're having some upgrades in some of the
12:28guidances, we're still talking about, at least as far as the large companies are concerned,
12:33we're still talking about very low single-digit kind of growth, at least for a year or so. So,
12:37it's not that exciting. Banks have faced some pressure on deposit growth. So, that might
12:44actually end up curtailing the overall lending growth also. So, those are some of the flags that
12:50probably the finance minister would have in mind when presenting the budget. You might see something
12:54for the banking system also, because deposit growth does seem to be a bit of a struggle.
13:00I wonder what can be done to shore up deposit growth. And it comes back to the question that
13:05I asked Radhika as well. Radhika Gupta, when the governor says that, you know, money is going,
13:11instead of going to the banks, it's going to mutual fund industry. Mahir, that's good for you,
13:16but is it good for the banks? So, when you say that something could be done to shore up deposit
13:20growth, like what? I mean, increasing interest rates could be one measure, but that's in the
13:26realm of the RBI. Well, you could have for the middle class, you know,
13:32hike in the slab rates, hike in the exemption levels of income. Plus, we also have the interest
13:44ceiling, maximum ceiling up to which you can have interest or rather tax breaks on your interest
13:51income. So, those kind of tweaks can definitely be done. But overall, you know, the mutual fund
13:55industry, while it's been growing, I think it's more a function of a percentage of household
14:02savings rather than, you know, mutual fund versus bank. We must also realize that a lot of savings
14:10are actually going to physical assets. So, I don't think it's mutual funds versus banks,
14:14it's physical assets versus financial savings. That's the debate.
14:20Now, just trying to talk about what could find a sure shot mention. We know,
14:26defense, railways, power, for example, will certainly find a mention because these are
14:30sectors that the government has a focus on for a number of years. Let me start with power.
14:36Where do you think or what's the quantum of thrust do you think? Could there be a surprise
14:41there? Or is it a present continuous? And will the markets have a positive takeaway
14:48from there? Because it's a very wide ecosystem of stocks which are listed,
14:53which could benefit or not from whatever is announced.
15:00So, the question is for...
15:02Okay, Mir, you can start, then I'll get Andrews. We had asked this to Andrew, but Mir,
15:06maybe you can start first. Sure. So, see, as far as the power sector is concerned,
15:13we have the PSUs and we have the private sector. As far as the transmission, distribution,
15:18generation ecosystem is concerned, most of it is in the central or state government ambit.
15:23So, those outfits are anyway spending the way the government expects them to. So,
15:29it's not a part of the budget really. The budget probably has more impact on areas like defence,
15:35railway, where there is a direct allocation, roads, etc., for example, where there's a direct
15:40allocation. So, on the power sector per se, the influence that the government is having could be
15:45more on the policy front and for which we've seen various measures for renewables, we have seen
15:52adequate incentives for even local manufacturing of a lot of components, etc. And the ordering
15:58in the power sector has picked up both in the private sector as well as the public sector space.
16:03So, I don't expect specific CAPEX-linked announcements for power. It's more on the
16:09policy front that we can expect something. Okay. Andrew, same question. Is power the space that
16:15you watch out for the most and within that ecosystem, therefore? What do you like or
16:19are you expecting better announcements in maybe defence, railways, what have you?
16:23No, I'm really not expecting anything more from what the interim budget said. I mean,
16:28there might be tweaks here and there. I would agree it's more of a policy in terms of power
16:34of how they can give orders. I think there's still a deficit, so maybe those companies involved in
16:42providing power from wind might be the areas that you get more focus on, more incentives for that
16:52for that to happen going forward to help with that deficit. So, that's what I'd expect to see.
16:59But I'm really not, for the interim budget, I don't see why they need to do so much more. We're
17:04all happy with that interim budget. I think the question will be how much more towards rural
17:10spending, where they're doing it. If it's towards housing, that's great. Maybe one sector which
17:15they'll look at a little more closely is the hospitality sector, because again, it's a big,
17:23in terms of employment, it's a big area. So, maybe they could do something for the hotel
17:29industry as well to get that picking up. It's going very well, but to continue that kind of
17:37move towards more employment in the services sector as well.
17:42Look at EZ Trip this morning, about 7% up since you spoke about hospitality, Andrew.
17:48Indian Hotels was the big winner yesterday. Shally's seen a bit of profit booking, but let's
17:53quickly see what's happening with Indian Hotels as well. That was the big winner. Yeah, a bit of
17:59profit booking there as well. So, yeah, you could see impetus for there, but I just want to take a
18:02second to talk about Borosil Renewables and what's happening there. 11% up, has been on a steady
18:08stream run since this morning, and no specific news. So, perhaps a clear budget play over there
18:16for a boost to alternate energy, even an Adani Green running up, Suzlon, of course, fantastic
18:22numbers, but nevertheless, also a big push there. Mihir, this is now a longer term theme, right? And
18:29we'll be talking about this next budget also, possibly at the budget after, because alternate
18:34energy is a stated goal, and it takes time to really push through. But what would be the top
18:40bets in this space, if investors want to ride that wave? Renewables is a vast area, and while
18:49we have huge amount of investments, which has been committed by other parts of the solar,
18:55in wind, of course, nuclear also coming up as a trust area, but generation is only a small part
19:03of the game. Equal amount of investments need to go into the transmission and distribution system,
19:07especially the transmission systems, because as we know, the renewables are not uniform in terms
19:14of their availability throughout the day. So, it needs a different set of transmission systems. It
19:20needs power storage as a system. So, I could expect something on the storage system incentives,
19:28something on battery storage, et cetera, if at all, we have to come to this situation for
19:35renewables. So, the way battery prices are coming down globally, say one or two years ago,
19:44very short time ago, I would say, even a couple of years ago, it was perceived that battery storage
19:49can be very expensive, and it's not viable as a mass storage device. But the way battery prices
19:56have come down in the last few months, it's now becoming increasingly possible that even
20:03large-scale battery deployments can be done for the buffering of renewable energy, so to say,
20:09storage of renewable energy, which is not uniform throughout the day. So, I think you might see some
20:14announcements on those, say PLI schemes, et cetera, more for battery manufacturing, et cetera.
20:21Those kinds of incentives are required. As far as the transmission, DMD, the transmission and
20:25distribution space is concerned, we have seen the state and the central transmission utilities
20:32announce projects in the HVDC space. So, those are anyway out there getting built out, and we
20:37are seeing it in the order to cover a lot of companies. So, that theme is already running,
20:41and I think the pace at which it is happening is also adequate. But on the battery storage part,
20:46you can expect, or storage in general, you can expect some announcements.
20:51Hi, it's also Samina joining in. A more broader-based question,
20:57what do you think the budget could do to trigger the next leg of rally on D Street?
21:07When we type this, that's the only thing. I think everything else has been played into the market.
21:15Right. Mihira, what about you? What are your thoughts? What could the budget do
21:19to trigger the next run-up on D Street? We are already up 5% this month, and we look expensive.
21:25Anything that the budget could have that could help the next leg?
21:31Well, there could be some relief for the middle class, the taxpaying middle class,
21:36because there is a feeling that the current slabs, et cetera, are kind of out of date,
21:42and given inflation, et cetera, you might want to at least move the exemption slabs up,
21:48so that it increases disposable income, and you can have benefits in the discretionary space,
21:53in the housing space, as the white-collar taxpaying population gets more disposable income.
21:59So, that's one definite possibility, or not possibility, hope, which can actually improve
22:05the sentiments. And of course, there's a lot of speculation on capital gains tax,
22:11speaking around the duration or the rate of capital gains. So, if there is no negative on
22:16that, that can be a good news. So, no bad news can also be good news. No bad news can also be
22:21good news. Andrew, what do you think the budget should not do or disturb at this current juncture
22:28we are at? There are a whole bunch of wish lists, I know, from various sectors, just like it is
22:32every year, right? But what do you think is non-negotiable in that sense? Well, from a market
22:40perspective, non-negotiable is increasing capital gains tax, and both long-term and short-term,
22:47that's non-negotiable for the market. So, that's the one area which we all worry about, right,
22:52and in which the market is worrying about. As I said, I think everything else that you could ask
22:58for, in terms of the interim budget, and now you're going to get more money towards rural
23:03expenditure, is a nice kind of Goldilocks scenario for the market to ponder on, and that's why you've
23:12seen a large move since the elections, on the back of this thinking that fiscally prudent,
23:21spending money on capex, getting the rural economy going, you can't ask for a better mix,
23:27right? It's a nice cocktail to drink. Andrew, Mihir, always great talking to both of you. Thank
23:33you very much for joining us and helping us understand what those expectations are from
23:38the much-anticipated budget.
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