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00:00Hello and welcome to the special show, Baju Trades.
00:12As we go into the much anticipated event tomorrow, we have with us two special guests, Gautam
00:16Duggar, Head of Research, Institutional Equities of Motilal Oswal, joining us and Rahul Arora,
00:23Head of Institutional Equities at Nirmalbang, talking to us about what the markets are expecting
00:28and how much of this is already in the price.
00:31Thank you very much for taking out the time to talk to us.
00:34To begin with, there's so much I know happening.
00:38Budget is just one of those many events that the markets are currently working with and
00:41grappling with.
00:42But let's start with that, right?
00:44With a weaker than expected mandate for the BGP, there is some sort of nervousness in
00:50some parts of the market which do believe that the budget could be a lot more populist
00:54than the equity markets would have liked.
00:57Do you agree?
00:58Do you feel that nervousness is justified at this stage?
01:00Good afternoon, Samina.
01:01Thank you for having me on the show.
01:04So I think that's a reasonable assumption to make.
01:06I think if you look at countrywide, when you look at states like Telangana, Jharkhand,
01:11Maharashtra, I think some populist measures have already started on the ground, whether
01:15it's with respect to farm loan waivers, increasing PM Kisan and so on and so forth.
01:20But it would not be an unreasonable expectation to expect that it would be more towards populism
01:26than CapEx in this budget.
01:28That being said, I don't think they're going to take the foot off the pedal as far as capital
01:32expenditure is concerned.
01:33Because I think if you look at the last 10 years of the current establishment, CapEx
01:38growth in the first phase, first five years, on a CAGR basis was about 15-16%.
01:44That dropped down to about 8% for the remaining five years, and it was FY19-24.
01:48Obviously, you had two years of COVID in that, where not too much CapEx happened.
01:51But still, an 8% category is not something that they would want to go down from.
01:55So, I don't think they'll necessarily take the foot off the pedal.
01:59But yeah, it would not be unreasonable to expect some kind of a populist trend.
02:04And by populist, I don't necessarily mean dole-outs, even for the bottom of the pyramid
02:09income levels, the tax exemption that people are talking about, if that's increased by
02:14a lakh or two lakhs, and that puts another 10-15,000 in the hands of people to consume,
02:20that's another way of looking at populism.
02:21So, I think all things considered, I think the headline number that everyone is obsessed
02:26with in every budget is the fiscal deficit, and I think that will probably be retained
02:30at about 5.1%.
02:31I can't see them changing that.
02:33But like I said, it would definitely be a 60-40 more tilted towards what you would call
02:39consumption populism, rather than CapEx.
02:43Consumption populism, which may not be too bad, given the fact that rural economy is
02:48the one that's struggling, and we saw that at the election outcome as well.
02:51But just before we go into that, Gautam Duggar of Motilal Oswal as well joins in.
02:56Gautam, hi, thanks for joining in.
02:57Gautam, before we talk about the budget, let's talk about how the mood has been on the street.
03:04How optimistic, how buoyed, how confident are market participants feeling just ahead
03:09of Budget 2024?
03:10Hi, good afternoon.
03:11Thanks for having me.
03:12I think, see, the mood is best reflected in the way markets have behaved in the calendar
03:18year, and also the way flows have been.
03:21In the first six months, you've seen close to $28.5 billion coming in from domestic institutional
03:27investors, which is, by the way, 30% more than what you've seen in the full calendar
03:32year 2023.
03:34So market, obviously, has been on a tear.
03:37If you look at the trailing 12-month returns on mid-cap, small-cap indices, today you're
03:41talking about a market where mid-cap index is trading at a 60% premium to nifty.
03:47Mid-cap index is also now trading at a premium to nifty.
03:50So clearly, the mood is very buoyant, and I would even say euphoric in some pockets.
03:55Clearly, some pockets where earnings have not followed through, valuations have gone
03:58for a toss.
03:59Insofar as large-cap is concerned, clearly, things are far more sober, I would say, vis-a-vis
04:07what we are seeing in mid- and small-cap pockets.
04:09Nifty is still trading somewhere about 20, 20.5 times, which is broadly in line with
04:14the 10-year average.
04:15Of course, if you look at the number 6 financials, valuations look very different, but so be
04:19it.
04:20Financials is one-third of the nifty weight, so you can't exclude that.
04:23There will always be some pockets which are undervalued, some which are overvalued.
04:27But broadly, large-cap looks okay to me.
04:30It's mid-cap and small-cap where things have gone a bit awry.
04:34As far as budget is concerned, I think we overhyped this event too much.
04:38If you see the last seven, eight years, you would notice that budget gets discussed 24
04:43or max 48 hours.
04:45After that, market forgets the budget and goes back to fundamentals.
04:48I don't think why this time it should be any different.
04:50Yes, there are some expectations because this is the first budget of the Modi 3.0 government
04:58and clearly the setback that they've received in the elections.
05:01So there are some tinkerings that can happen in the overall budget numbers.
05:05But broadly, I think the policy of fiscal conservatism and overarching focus on capex
05:10should continue with a little bit of tilt or some allocation given to bottom-of-the-pyramid
05:17or middle-class or tax giveaways, so have you, because you have one and a half lakh
05:21crore of extra firepower available thanks to the RBI dividend.
05:25So I hope the government utilizes it sensibly and encourages consumption at the bottom because
05:31that is one area which has been severely lagging in the last two and a half years, if you look
05:35at the corporate results.
05:38Rahul, I want to try and understand from you as well, what are your thoughts on the broader
05:43markets?
05:44I remember a few months ago, it was CLSA that put out a whole list of stocks calling them
05:49Modi stocks.
05:50There were a bunch of them and most of these stocks haven't moved very much since the election
05:55verdict on the 4th of June.
05:57As we go into the budget this time, the bullish sentiment index indicates 92% people are optimistic
06:06in that sense about the budget, which makes me believe that with very stretched valuations,
06:11extreme optimism around the markets, we may be looking a lot more vulnerable now than
06:17we ever have.
06:18Would you agree?
06:19So I think, Samina, the one thing that the sell side has got perpetually wrong for the
06:24last 10-12 years that we have seen, and I think everyone collectively needs to take
06:28responsibility for it, ourselves and our brokerage included, is we overestimate earnings at the
06:34start of every year, and we have to, at the end of the year, downgrade those earnings.
06:38And I think this has been a consistent phenomenon for years, and if you look at the Bloomberg
06:41estimates, they will be no different.
06:44You were talking about valuations.
06:47I think when you look at the mid and small caps, they have gone beyond reasonable expectations.
06:52I don't even think there is a conversation to be had about whether they're reasonable
06:56anymore.
06:57When we talk to institutional investors and some of the larger ones, we're actually discussing
07:02sell ideas, believe it or not.
07:04They actually want to know what to exit rather than what to buy.
07:07And I think, you know, I was just looking at, you know, we research about 180-190 outstops,
07:12and I was looking at the last four quarters' data.
07:14On average, we have downgraded about 60-65% every, you know, on a trailing basis every
07:19quarter.
07:20So you're not in an earnings upgrade cycle by any stretch on an aggregate basis.
07:25Will stocks be cheap?
07:26Of course.
07:27There will be stocks that are cheap at a 24,000 nifty, there will be stocks that are expensive
07:30at an 8,000 nifty.
07:31But I think at an aggregate level, there is just way too much.
07:34I think it's beyond price to perfection.
07:37Just take a look at what's happening with Wipro today.
07:39You know, there is no room for error.
07:41If you slip slightly, the market's going to punish you.
07:43There seemed to be a semblance of that happening with defense stocks last week.
07:47I think we're probably the, you know, one of the first brokers on the street to actually
07:50downgrade the entire sector to a sell because, you know, it had reached levels that we, you
07:54know, did not understand.
07:55And we were happy to put that.
07:57But I think the way the market is behaving, and this has nothing to do with the budget.
08:01And I think, you know, the point has been made consistently, Samina, and you probably,
08:06you know, running your shows have been bored of hearing of this, is that it is a liquidity
08:10driven rally.
08:11I mean, it is way ahead of fundamentals.
08:13Any fund manager, you know, that you speak to will tell you that, you know, for companies
08:17that are 20, 25% return on equity or capital employed, stocks are trading at 55, 60 P's.
08:23That kind of makes no sense.
08:24So, I would personally love it if you had a 15, 20% correction in the market, I think
08:29it would restore some sanity.
08:31But I think the probability of that, Samina, I pretty much thrown in the towel, I've got
08:35my call on the market consistently wrong, you know, we're up 18% from the 4th of June
08:39lows, and nothing has changed in India barring flows.
08:41So, you know, if the flow is sustained, then, you know, who's to say where we go.
08:46But, you know, given where the overall fundamentals are, especially with respect to earnings,
08:52I think we're way, way ahead of my research.
08:54I think it's uncharted territories, Rahul, and I think people who've been calling it
08:58a top, stay on the sidelines, making cash calls all the way back in October, are probably
09:04going to be disappointed as we look at things right now.
09:06But the fact remains, 20% of Indian household spending is now coming into financial assets
09:11and this money is sticky.
09:13So I think that's what we need to be mindful of as well.
09:17But let's move on to a few other aspects before we go into earnings and the fact that the
09:21markets have borrowed returns from the future.
09:24Gautam, one thing that I wanted to highlight with you and, you know, get your perspective
09:28on is the monster that rears its head out before every budget.
09:33And that's the fear of changes to our capital gains tax regime.
09:37The same worries seem to have resurfaced in many quarters and some believe that this could
09:42be almost a given this time around.
09:44Do you think Budget 2024 will see any tinkering or changes to the existing capital gains tax
09:50regime?
09:51As it stands, the current regime is, or the different rates, the different holding periods
09:56based on different asset classes.
09:58What is your expectation here?
10:01So I don't expect any change.
10:02See, it's an annual ritual where we, you know, prior to budget, every year discuss about
10:09the bogey of inheritance tax, wealth tax, changes in long-term capital gains tax.
10:14So this year is no different and, you know, everyone goes wrong after the budget is over.
10:20So I think government is making good sort of collections on short-term capital gains
10:27tax on STT.
10:30So capital markets are doing well.
10:33In general, the wealth creation has been pretty phenomenal for the last five, last 10 years
10:38also, because Nifty itself has compounded at 16% for last 10 years.
10:43Mid-cap at 20% and small-cap at 24%.
10:46I'm talking about a 10-year data.
10:49Economy is doing well.
10:50Macro, micro are in perfect harmony, I would say.
10:55So it will be very, you know, I would say imprudent for a government to now tinker with
11:01something which is doing well.
11:03It's not as if that they're going to make a huge collection, even if they change the
11:07duration or they change the tax rates much.
11:11So at least I don't expect too much sort of tinkering over there, and hopefully this
11:18will be forgotten after 48 hours, because tomorrow the entire media investment community
11:24is going to get busy discussing this thing.
11:26But if you go by the past experience of last five, six years, you can check the news flow
11:31before the budget.
11:32Every time there is a discussion on whether inheritance tax is coming or not, there's
11:38going to be a big change in long-term capital gains tax or not.
11:41I think the way the political results, the mandate has been of 4th of June, I don't think
11:48government will take a step where they start antagonizing more middle-class people now,
11:55because if you look at the way equity cult has evolved, in the last four years, the demand
12:00account itself has gone from 3.5 crore to 16 crore.
12:04So equity investment is no longer the reserve of a few cities or a few pockets.
12:10It's spreading across the geography.
12:13So I don't think government is going to try and tinker that for a few extra hundred crores
12:18or thousand crores of, you know, money.
12:20They can easily get that from some other line items here and there.
12:24Right.
12:25Rahul, very quickly, a very unconventional view came about last week, where Chris Wood
12:31of Jeffries said that India does not need a capital gains tax regime, and he cited the
12:36example of jurisdictions like Hong Kong, which have actually benefited.
12:39Do you want to respond to that?
12:41Do you feel like there could be some streamlining or that very, you know, very extremist view
12:47coming from Chris Woods actually holds some value?
12:50I think even if it's to be done, Samina, I don't think this is the right time to do it.
12:54And partly because I think, you know, the kind of investors that have come into the
12:57market post-COVID, they haven't really seen a bear market, they haven't tested waters.
13:02I think, you know, once these, a lot of these people that have come in, you know, in the
13:06age group of 18 to 25, 30, they, it's too early to set them back with these kinds of
13:12regulations is my sense.
13:14Would it probably happen over a longer period of time?
13:16Yeah, but I think it would potentially derail a little bit of the equity culture that you're
13:20looking to establish.
13:21I think, I mean, if you look at capital markets today, they've become the default funding
13:25option.
13:26I think, you know, you have flows moving away from fixed deposits into mutual funds.
13:31You know, you have promoters looking to tap capital markets to raise money.
13:34So I think at this point in time, when it's become the go-to weapon, sort of, so to speak,
13:40for various aspects, I don't think this is the right time to do it.
13:43I mean, we can debate on whether there are merits or demerits of doing it, and I'm sure
13:47if the government decides to do it, they will see merit in it.
13:49But I think this, at this point in time, when you're just looking at the financialization
13:53of savings happening into equity markets, you know, despite these ridiculous valuations,
13:58you're seeing 30,000, 40,000 crores of flows that are coming in.
14:01I don't think, you know, the government would do anything to derail that at this point in
14:04time.
14:05So, look, personal income tax collections are extremely buoyant.
14:08I think, you know, we must be one of the very few countries in the world where our growth
14:11in personal income tax is more than the, you know, growth in the corporate tax rate.
14:15And that's one of the reasons why people keep talking about giving tax breaks to the people
14:19who actually fund the economy, which is basically people like you and me.
14:23But, you know, that becomes counterproductive from the government standpoint at many levels.
14:27So I don't think at this point you're going to tinker too much with it.
14:30I think it will probably be counterproductive in the larger scheme of things to be doing
14:33anything capital gains tax at this point.
14:35Now, let's go down.
14:36Let's get down to actionables now and what investors should be doing.
14:41I know most portfolios haven't done half as well as the index itself.
14:44And there is still a feeling of, you know, FOMO in that sense.
14:49What do you recommend investors should do?
14:51Should they take profits off the table, reinvest it in a staggered manner?
14:56Would you recommend them keeping some dry powder for a potential correction and a better
15:00opportunity to buy?
15:01If yes, what sort of levels would those be?
15:03Because from where we stand right now, we definitely have borrowed significant returns
15:08from the future already.
15:10So I think, Samina, wherever your stocks are trading at north of 50-55 times out of one
15:16year forward, I think that's the answer is very evident.
15:19You can certainly sell. I think where you can move in is where valuations are still
15:23reasonable.
15:24I still think in the BFSI sector as a whole, valuations are not demanding.
15:29I mean, the elephant in the room, HDFC Bank, currently trades at about 2.2 times one year
15:34forward price to book.
15:36They've grown their NIS by 26 percent, their profits by 35 percent.
15:40I mean, I don't know what else the street is from this company, but I think, you know,
15:45names like this, I think you have value picks even in the insurance sector.
15:49You know, I think there is some value even on the gold finance side, something like a
15:53Manapuram Finance, where for a 16-18 percent trade-off, NYCURI trading at one time's
15:57price to book. So I think definitely BFSI is one place where you could look at.
16:02I think technically, Samina, the market was underweight on IT services.
16:07And I think that's why, barring Wipro, I think the other IT results that you have seen
16:11have been very easily bought into.
16:13Add to that the potential noise that has been increasing as far as the Trump presidency
16:18goes. And, you know, a lot of polls are putting him ahead.
16:21That could potentially bode well, because I think if you look at, you know, how globally
16:25things stack up under Republicans versus Democrats, the overall environment may actually be
16:30more conducive towards spending in the United States, particularly because Trump is a
16:34capitalist. And given the BFSI exposure that you have for Indian IT companies, I think
16:38IT could be an interesting play as well.
16:42And go back to where we started this conversation, Samina, if the government does indeed
16:46decide to tilt a little bit towards consumption, again, that same technical factor of
16:50under-ownership is there in consumer staples.
16:53So I think there could be potentially some interest moving into names like an ITC,
16:57Darbar, etc., you know, if the rural recovery takes place.
17:00So I think there are still some pockets.
17:02And lastly, maybe cement.
17:03I know Ultratech wasn't a great bet, but I think that could potentially, because, you
17:08know, the first order that the prime minister signed when he came back into office was a
17:13housing order. And I think NHAI's road allotments last year were not that good.
17:18They'll probably pick up this year.
17:19So I think these are three or four sectors where valuations are not as demanding today as
17:24probably the rest of the market are.
17:25So you can certainly take profits in companies where, you know, your stocks are trading
17:29north of 50-55 times and look at entering some of these stocks and sectors.
17:33OK, so that's BFSI, insurance, consumer staples, cement.
17:38Rahul's been kind enough to name a few like HDFC Bank and the likes of a Darbar that one
17:43could allocate to an IT as well.
17:46Gautam, what about you?
17:47What is your portfolio stand currently?
17:49Have you recommended to your clients to sit on cash?
17:52If yes, how much?
17:54And if there is a re-entry point, where would that be and where would that money go into?
18:00So we just published our model portfolio a full time back.
18:03We made several changes.
18:05We had gone overweight on IT, overweight on pharma from being underweight and neutral
18:10earlier. We have reduced auto from overweight to underweight now.
18:14We continue to be significantly overweight on PSU banks.
18:17We find valuation is very attractive even now in private banks.
18:21We are slightly underweight because of our underweight stance on HDFC Bank since two
18:26years now. So that stance continues.
18:29But within the private sector banks, we are overweight on ICICI and Axis.
18:34Then we are overweight on industrials and real estate, which have played out beautifully.
18:39But now we have to reassess given where relative risk reward lies.
18:43And as far as underweight is concerned, we are still underweight on energy.
18:48We are underweight on metals and also on cement.
18:52So our entire capex and industrials weight is lying in capital goods and minor weight
18:59in defense. And of course, big overweight on real estate.
19:03So net net, we are trying to move the portfolio slightly more defensive, which is why
19:08you have seen a change in allocation towards IT and pharma.
19:13And then in consumption, we have a huge weight.
19:15We have about 20 percent weight in consumption.
19:18But within that discretionary has been our preferred choice.
19:21So all of that 20 percent weight staples is only 4 percent and 15 percent is consumer
19:26discretionary. We have names belonging to jewelry, hotel, QVSR, food delivery, then
19:34cables and wires, all sorts of things.
19:37So from a slightly longer term perspective, we've been more positive on discretionary
19:42versus staples. But staples, opportunistically, one can play for this budget event.
19:48I don't expect any significant pickup in volume growth there.
19:51Maybe something which is growing at 20 percent volume can grow at 4-5, but it won't
19:56change the trajectory of earnings growth beyond a point.
20:00Well, thank you very much, Rahul and Gautam, for joining us today on this edition of
20:04Budgetary just ahead of the big event tomorrow.
20:07While you said or both of you said that this event is a 24 hour event and markets are so
20:12much more beyond that, but significant because it gives us an opportunity to talk to
20:17guests like you and build perspective for our viewers.
20:20But on that note, thanks for watching.
20:21There's a lot more programming on the other side, so keep it with the channel.