India may see rally next year if policy reforms implemented: Sanjeev Prasad, Kotak Institutional Equities

In an interview with ET Now, Sanjeev Prasad, ED & Co-Head, Kotak Institutional Equities, gives his views on the Indian markets. Excerpts:


ET Now: These are clearly dark days for Indian markets, but are we nearing the dawn or the pain is here to stay?

Sanjeev Prasad: Well, it depends on how the events pan out over the next two-three months. If the government can implement certain much-required reforms, we will be nearing the dawn. But, if you continue to see policy paralysis and inaction which we have seen for the last couple of years now, then you could see the current situating prevailing for some more time.

So, if the government can implement some taxation reforms, we can get our revenues up. GST and DTC have been talked about and debated for some time, but it is time to implement the norms because of our increasingly worsening fiscal position as taxation reforms are very very important.

I think next step is to get some of the stalled execution/implementations show the light of the day. Third would be power sector reforms.

So if we can get some of these things going, valuations are quite supportive. I think you could see a rally next year, but if we do not change the way we have been operating for some time, you could see the market pretty much at the current levels for the next six months.

ET Now: In a year when markets are down 23% in absolute basis and 37% in dollar terms, I am sure you are getting calls from some of your clients who are nervous. So, how exactly are you addressing their concerns? Are you advising your clients that they should reduce exposure to India and the India story is over?

Sanjeev Prasad: Well, not really. What we are saying is just stick to the high quality names. If you see the portfolio which we have, we are recommending very strong names. Then we have overweight position in some of the economic past which do not have much to do with India as GDP numbers. For example, if you see a slowdown in the economy you would not see a big impact as far as the volumes of these companies are concerned.

For things like ONGC or Coal India, the earnings numbers do not depend that much on global prices. And then you looked at companies which have very strong balance sheets for trading at an expensive valuation some thing like Reliance Industries or Tata Steel, for example.

So, you can have a combination of really good large cap names which are trading at reasonable valuations. And then you put some money in some of the consumer names which are now trading at very cheap valuation, but at least you have some defensive characteristics over there. And that is how you build the portfolio at the time being and just hide over there till the time you see some improvement in the macro factors, fiscal deficit, inflation, interest rates starting to come down with the next figures. And then you hope for some governance improvement as far as government policies were concerned.

As long as you do not see much of the improvement in underlying macroeconomic and governance issues, continue to stick with the large cap high-quality names to just make sure that you do not lose too much of money in the process.

ET Now: You have been talking about the policy measures by the government. The food security bill, do you think that was more of a populist scheme and in your view how much does it add to the fiscal strains?

Sanjeev Prasad: As far as our computation are concerned, it would add about Rs 250 billion to government’s subsidy bill. If we get numbers for this year, the government has budgeted above Rs.606 billion for food subsidy, as far as the government’s own number is concerned, this could increase to about 950. Our maths suggest it is closer to about 250, but it first depends on how many people went into the new scheme and so on and so forth, but it could be somewhere in the range of about Rs 252-300 billion as far as subsidy numbers are concerned.

Now coming to the food security bill itself, you cannot really dispute the philosophy outfit in the sense you have a lot of poor people. You saw if the government disappoints food, I guess that is no good thing. The thing is India is in a position to afford so much at the same time and what are we doing to enhance tax revenues on the other side. So India would have to follow some sort of a balanced approach in the sense if you are going to be spending money on some of the social welfare schemes, which are we guess important, at the same time we have to ensure that there are sufficient tax collections. If you look at some of the tax GDP numbers, the peak number which we had and if you look at simple tax as a proportion to GDP, that has come down to 10.1% in 2011 and will decline in 2012 and definitely 2013 also.

So, on one side we have tax revenues which are not going very fast and if we keep on increasing the outlays on subsidies, which are open-ended subsidies because the government keeps on increasing the MSPs going forward for example, the overall subsidy numbers would also keep on increasing.

Similarly, if you do not increase fuel prices and the subsidies keep on increasing when global prices go up for whatever reason, then again the amount of subsidy on fuel goes up, though it was pretty often when the subsidies whereas the right way to approach is, but we need to ensure that we have sufficient amount of cash revenues to finance the finite amount of subsidy.

Over a period of time either we should at least keep on reducing the subsidies or deserve a subsidy reforms. So UID scheme is a step in a right direction, but it has to be implemented to enable the subsidies go to the right kind of persons.