Hi All,
We had huge expectations from the 2014 budget presented by
Arun Jaitley last week. It had been hailed as the most awaited and path
breaking budget ever in Indian history
and what not. For obvious reasons, it failed to live up to the hype. The fiscal
constraints/ high fiscal deficit and macro-economic issues (high inflation and
low growth) also tied his hands to a large extent.
Though , I agree with the experts that the budget was not radical
, transformational and Visionary , it
was not a bad budget at all . It had many elements which will significantly
facilitate the turnaround in Indian economy and lay the foundation of a strong
economy. Let me put a few highlights and lowlights of the budget to reinforce
my argument..
Highlights :-
1)
He stuck to his guns on the fiscal deficit
projections with 4.1% in FY15, 3.5% in FY16 and 3% in FY17 , though a detailed
roadmap on how to do it was missing and some of his assumptions on buoyant
revenue collections were too optimistic
2)
FDI
reforms – He started the FDI reforms again with 49% ceiling in Insurance
and Defense , through critics might be right that he could do at least 51
percent to effectively lure more foreign investors with technology transfer
3)
Agriculture – His emphasis on enhancing
agricultural credit ( Rs 8 Lac Crore) , extending the interest subvention of 3%
to the existing agriculture credit, targeting MGNREGA funds towards rural and
irrigation related infra , creating irrigation and rural infra should go a long
way to enhance rural economy and to
target agricultural growth of 4% in long run
4)
Investment cycle – The budget will play a good
part in kick starting the investment cycle by pushing PSUs sitting on cash
pile for significant investment(>2 Lac Crore), allowing the
banks to recapitalize through FPOs(Public offerings), clearing the approvals of
stuck up project and through massive investments in infrastructure(especially
roads, ports and airports). Permitting FDI in Railways is also in the pipeline.
5)
Infrastructure – The plans to create 100 smart cities,
plans to execute 8000 Kms of National Highways (about Rs 38 K crores), plans to
create many more airports in Tier 2 and 3 cities, more ports, dedicated railway
freight corridors, Goal to supply 24X7 power to rural structure as well as
urban areas in few years will be a big boost to the infra-structure, provided
they get executed. Allowing banks to raise long term bonds for Infrastructure
and affordable housing (with no obligations on CRR and SLR) was a big positive step
to unlock credit for infrastructure and affordable real estate. Tax reforms on
REIT and Infra Investment trusts as well lowering the threshold on real estate
FDI will help in getting more funding for real estate.
6)
Manufacturing and skills - He also talked about
intent to enhance manufacturing sector and build skills among the youth to
exploit the demographic dividends
Lowlights :-
1)
The big
bangs, transformational and radical measures which was expected after the big
hype Modi had created during election campaigns was missing . The massive
mandate Modi got after the elections gave him the power to bring in significant
reforms and measures which could have transformed Indian manufacturing,
agriculture and infrastructure in next 4-5 years.
2)
The details on Fiscal Roadmap was missing on how
to reach the stiff fiscal targets.
Roadmap on subsidy reduction as well as Tax reforms were missing.
3)
There was no firm commitment on GST as well as DTC.
4)
Past retrospective tax incidences were not abolished
5)
Nothing significant was announced for service,
telecom and IT sector which constitutes major part of Indian GDP today
6)
Though the intent on making manufacturing the
backbone of Indian economy was declared, the details and roadmap was missing like labor law reforms , Special
manufacturing zones or manufacturing growth strategy was missing.
7)
No significant announcement on Energy sector –
gas prices, subsidies reforms etc.
Implications on
Indian economy and markets:-
As I said earlier ,
though the budget was not radical and trans formative , It had many elements (like
those highlighted above) which will significantly facilitate the turnaround in
Indian economy and lay the foundation of a strong economy. Perhaps, the
Government’s budget communication in Parliament have become over-hyped in India
and we are putting too much of expectations around these communications. Its
high time we should de-hype these budget
communication and start focusing on the fundamentals of businesses, economy and
investing. There are lots of actions which happens beyond the Government budget
which really impacts the economy and thereby markets . For example ,
Government’s initiative to amend the Land acquisition bill, Government’s speed
in clearing the massive infra and power projects stuck up in green approvals,
Government’s action to secure coal
linkage to all power projects, Government’s action on controlling prices ,
RBI monetary policy actions are all
happening outside the budget process. Besides
Government need not announce all the actions and measures during the first
budget itself . Public memory is short and hence Jaitley and Modi may save some
of the big bangs reforms/ announcements for the next few years.
Now that the budget communication is over, what will really
impact the Indian economy would be execution…execution and execution on the
part of Government as well as corporate sector. Even if Modi’s government acts
and executes 40-50% percent of key plans and measures announced in the budget ,
we will be seeing Indian economy in the 8-9% growth again( so called “ Ache
Din”) in next 2 -3 years. Successive
Indian governments and its infamous
bureaucracy has never been seen as
wanting in ideas and plans but severely wanting in execution of those
plans and plugging of leakages in
allocations. What will now impact the Indian markets going forward would
be turnaround in economy through execution as well as growth in corporate
earnings- actual and guidance numbers.
Good news for Indian economy is that there are many domestic
and global green shoots which point towards turnaround in Indian economy . IIP
(Industry production) numbers have been positive in last few months(June
numbers showed >4% growth). Export growth has been in double digits (>10%)
for last 2 months. Inflation for June was at 7.3%(CPI) , lowest in last 30
months and lower than RBI target for 2014 (8%). Current account deficit is at
<2% which along with steady FDI/FII flow has kept Rupee exchange rate in check
at about 60 to Dollar. The global coal and Iron ore prices have come down by
20-25% this year. US, Europe and Chinese economy are showing good signs of
growth which will help our products and IT services exports. The only credible
threat is failing monsoon which can have adverse impact on food prices and
rural economy and gulf situation at Iraq which can have an adverse impact on
crude prices.. Lately , even the monsoon
has shown some revival with monsoon deficit projections for July coming down to
15% from 41%.All these green shoots are again nothing to do with budget but
will definitely help in turning around the Indian economy.
Implications for
retail investors – As I have been predicting since last 2 years in my blogs , we are sitting on a huge bull
run which may last for many years , mainly on the back of an economy which is
turning around and will start growing again at 8-9% in few years. Now that the
hype over elections and budget is over, the market will return to its normal
self and irrational exuberance will take a dip. This may lead to some
consolidation and range bound movement in short run but the long term bull run
is still very much intact. As the market have grown >30% in last 9 months
and 20% YTD due to high expectations and
hype , some of the stocks have grown too fast in last 6-9 months(especially in
cyclical sectors like Banking and Finance, Infra, power , real estate etc) . We
therefore need to tread with caution and
cannot invest in any stock or sector , expecting them to grow. However , in
this market where the index is fairly valued now , we still have many businesses which are solid and are
available at reasonable prices to enter. Hence bottoms up strategy in picking
up the rights businesses/ stocks is the best strategy. If I take up my 2014
portfolio , the leading stocks where I will enter and invest now would be BOB,
LIC Housing Finance, REC, Power Grid, Bajaj Finance, Reliance, Coal India and M&M(9 out of my 15 2014 portfolio
stocks).
BOB- Bank of Baroda -
This is the only biggie PSU bank
which has shown a consistent growth track record in last 10 years(>15%
CAGR), consistent ROE(>10%) as well as consistently good track record
on NPA(among the lowest in PSUs) and yet
available at cheap valuation(About 8 PE ), though it has run up recently
LIC Housing Finance – Would benefit a lot with Government
push on affordable housing , plan of 100 smart cities and emphasis on housing
in tier 2/ tier 3 cities. Has showed a consistent track record of >15% CAGR
growth and yet available at low valuation (12 -13 PE).
Coal India – Has needlessly corrected in recent times around
budget. Competitive advantage on Coal sector because of monopoly sector. Will
gain from government push to get the coal mines approvals / clearances as well
as building railway tracks for transportation.
L&T – Its the best proxy to the Indian economy growth
story . You can never stop investing in L&T , till Indian economy is
growing.
REC – Has needlessly corrected by >15% in recent times
after budget as budget didn’t provide for any provision for tax free bonds. Huge
competitive advantage on rural electrification. Wi ll gain from Government goal
to achieve 24X7 power for rural areas in next few years
Power Grid – Although it has run up in recent times, its
still cheap at 13 PE with growth projections of >20% CAGR in next few years
due to power transmission push by Government.
Reliance - It has not run up much after the new Govt and
corrected needlessly in recent times due to lack of clarity on gas pricing and
government actions/ regulations like recent penalty . It will gain in medium
term due to clarity on gas pricing, its plan to invest , impending clearances
from Govt. on its plan to expand production in KGD6 and its US Shale gas production. Besides,
retail segment is turning around.
Bajaj Finance – Although the
prices have run up , its still cheap at 13-14 PE as it has shown consistent
growth records of 25-30% CAGR. It will gain with turnaround in consumption with growth pick up in Indian economy.
Bajaj Auto - This will benefit
from the budget allocation and push in the rural economy through agricultural
credit and infrastructure building etc. It has not run up fast and has
underperformed Sensex . But with push on rural economy and turnaround in Indian
economy, good product pipeline and strong export performance, Bajaj Auto should
do very well in next 12 months, despite bad Q1 numbers.
That doesn’t mean that the other
stocks in my portfolio are no more in my horizon to invest. I am just waiting
for them to correct a bit so that they again become attractive from investment
point of view.(Axis Bank, ICICI bank, HCL Tech,IDFC,GAIL and M&M). They are still
fantastic businesses but have run up too fast in recent times and I would like to wait to
start investing again in them whenever we have dips.
Remember that the key to make money consistently in Indian markets now is to find few of the best available
businesses with strong growth track records, strong balance sheets , competent
managements and durable competitive advantages , which are also very good
proxies to Indian structural growth story and invest for long term , whenever
the prices are reasonable .
Happy investing
cheers
Amar
