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