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Rasheeda Bhagat

Mr Arun Kejriwal of KRIS

WITH the transaction tax row settled satisfactorily and changes coming in long- and short-term capital gains tax, sizeable inflows will come into the equity market, says Mr Arun Kejriwal, investment expert and Director of the Mumbai-based KRIS. Optimistic on the long-term market outlook, not only because the Indian story is reading well but also because of the reduction in short-term capital gains tax, he says, "We will now see a new breed of investors. Till today any income declared in the stock market was looked at suspiciously by the IT official who thought this could be money siphoned off from somewhere and declared as profits. But now he cannot doubt this declaration. So more retail and high networth individuals move in."

Mr Kejriwal strongly recommends booking profits, and points out that when SAIL touched Rs 60 "we sent out letters to our investors saying it has no business to be at this price, so sell. Particularly the change in the short-term gains tax makes portfolio churning an attractive proposition. Investors can book profit as they have to now pay only 10 per cent tax." In seminars at Ahmedabad, investors wanted to know what the Budget meant for different sectors. "I told them the FM has dealt a double whammy to the steel industry; he has lowered the Customs duty and raised the excise duty, encouraging import against use of local steel." But with Tata Steel's results being "excellent and the company really doing wonders," this is a stock investors should look at. "As its MD, Mr S. Muthuraman, says, the talk of Chinese slowdown is humbug for one reason... India's total steel production is 39-million tonnes and China's incremental demand is in excess of that. So where can there be a slowdown affecting India? And, India is also developing and we are using more steel than in the past. So despite the Budget, because there is no alternative to steel — you cannot use aluminium instead of steel — the industry will do well."

With monsoon fears receding, both the auto and auto ancillary sectors would do well. Component makers, such as battery and tyre manufacturers, need to be watched "because the replacement market is even bigger as the base has been widening rapidly, and it is more lucrative than the OEM market where the prices are squeezed."

In the power sector, with new capacities needed, companies such as Tata Power and Reliance Energy would do well. Equipment suppliers to the power industry, such as ABB, BHEL, and Siemens, as also the only existing power trading company, PTC, would be good bets.

Tea is another sector looking up. "After a five-year slump this industry is reviving. Tata Tea is a good play because the leveraging done in Tetley is now paying off."

The high oil prices make refineries also a good bet. "The only negative is that the marketing companies will always be squeezed, but as long as oil prices remain high, despite the subsidies extracted from them, their profits will not be hit because refining margins go up when oil prices go up. So they will be making good money. Of course, standalone refineries are not hit by subsidies so they become better bets than the marketing and refining companies," says Mr Kejriwal. His picks in this sector are Chennai Petro, IOC, Kochi Refinery and HPCL, as also ONGC.

He is also bullish on the banking sector. "The first salvo on interest rates has been fired by HDFC by increasing home loan rates by 25 basis points. This is going to have a cascading effect on other banks. And if interest rates increase, there should be no fear of bank profits dropping because there is always a six month lag period before the differential in interest rate is fully passed on or neutralised from the bank's perspective. The banks always stand to gain when the interest rates go up or down." He recommends SBI at Rs 415-420 levels.

Mr Kejriwal says that some people believe that the NPAs from the farm sector are a cause for concern. "I disagree. The amount lent to the farm sector is a pittance. We have one single defaulter in the industrial sector owing more than Rs 2,500 crore collectively to the banking system. The entire farm sector does not owe this kind of money to the banks. So where is the comparison between the farm and the industrial sectors? In the last 15 years, the average recovery from the farm sector has been 98.5 per cent against only 91.5 per cent from the industrial sector. With this kind of a mismatch, to say that banking will do badly because of the farm sector is incorrect. The system is flush with funds; if there is a slowdown, it is going to hit everybody and banks will have more funds to give... and if they have to do some sort of priority lending to the farmers, why not? History tells us the farmer has always repaid his loans in a good year."

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