The market's first reaction to the Budget was negative? Have you changed your stance on the Indian markets?
We haven’t revised our price targets. There were a lot of expectations from the Budget. That’s why we saw the selloff (on Saturday). Also, the scare around coronavirus
played its part. Once again the markets
have rebounded and shares of several companies are doing well. We are back to basics. The focus will again be on growth and earnings. Hopefully, the global environment will continue to be supportive.
What are the investment themes that have emerged from the Budget?
As such, there is no new theme. The only thing was insurance, which we corrected by removing it from our model portfolio. Today, you can invest in insurance and get a tax benefit. But the direction in which we are going, the benefit may not be there. So it is negative from the flow perspective. The other aspect is DDT (dividend distribution tax); after it goes away, the effective tax rate moves up for insurance companies. We believe the insurance story has long-term potential, but it will go through a phase of consolidation. Currently, we are focusing on an investment-led growth -- whether it is construction or cement or select financials.
How will the removal of DDT impact corporate financials?
Now the question is, whether companies increase the dividend or retain the tax saved. If a company needs capital, it will have the lever to keep that extra capital. Companies which don’t need the capital can increase payouts. From a promoter point of view, a tax-efficient alternative could be buyback. So I would expect a lot of companies to announce buybacks. From a foreign investor point of view, you have made the assets relatively attractive from the tax purpose.
How do you see earnings growth shaping up?
There are still some tailwinds. Every year, we are cutting earnings by 15 per cent. Even this fiscal year, if you adjust for the corporate tax cut, they are 15 per cent below consensus estimates. The earnings cut had been more intensive towards the second half of the last calendar year amid a slowdown in the economy. Now you have things like improvement in rates at telecoms; major NPA issues, too, are behind us. All of these are helping. We now have to see how things pan out globally. There could a potential impact on sectors like metals if commodity prices come off. At this point, we think there will be a 5 per cent cut in consensus earnings estimates, both for FY21 and FY22.
Nomura recently downgraded India from ‘overweight’ to ‘neutral’. Are other regional peers looking attractive?
We went overweight on India in October as the government stepped up reforms. At that the time, we had a positive view on India versus other Asian markets, which were affected by the (US-China) trade tensions. However, with the trade tensions receding and valuations looking cheaper, our strategist took a call of going overweight on some other markets. Now, this issue of coronavirus
has emerged, which again makes India relatively better than some other markets exposed to stuff like tourism. In the near term, India has the potential to look safer.