It is likely to be a ‘middle path’ Budget, says Pankaj Sharma of Equirus Sec

Investors should not have high hopes from the upcoming Budget given the challenges the NDA government is facing, according to Pankaj Sharma, head of Equities, Equirus Securities. A long-term investor can look at recent corrections as entry points. Britannia, Torrent Power, Infosys, Reliance Industries and Coal India are his top picks. Edited excerpts of an interview with him:

What is your view on rate hikes by the US Federal Reserve? Which do you think is more important in terms of its impact on global markets — the US or China?

We think the Fed would hike rates at least once or at the maximum twice this year. From the global markets perspective, both the US and China are important. China because we see that the correlation of commodities with China is higher. And the US because rate hikes would have a bearing on the performance of emerging markets.

India’s fundamentals are not getting better as was perceived earlier and the valuation premium has come off. Your comments.

The linkage of the performance of local markets with factors such as the rise or fall in crude prices, worries or stimulus in Europe and the possibility of a soft or hard landing in China is unlikely to weaken in the short term. The valuation of the Indian markets and premium has come off due to disappointments on how quickly things can improve locally and the pace of reforms is slower than most investors’ expectations in last two years. India may be a better emerging market but we are certainly not cheap on a comparable basis.

Going ahead, every time there is carnage abroad, will India see an equal reaction or will the correlation reduce?

India is still better placed and certainly more attractive as valuations are much more reasonable now. But India cannot break away from EMs so easily in the minds of foreign investors. The attractiveness of equities in the emerging markets as an asset class has been impacted significantly. We don’t think that this correlation will reduce in the near term.

What are your expectations from the Union Budget?

Budget 2016 will not be an easy task for the NDA government. Because of massive headwinds linked to global factors which are well-known and a not-so-buoyant local economy, the simple challenge for them is to revive the growth cycle as quickly as possible and push for more reforms.

Overall, it is likely to be a ‘middle path’ Budget. There are three key themes we expect to see in the Budget this year. They are: Don't expect too much generosity on the tax front, more money in the hands of rural households, and public capex.

How much can the market correct if the Budget disappoints even slightly? What will be those disappointing factors?

The expectations from the Budget are not high considering the challenges the government is facing. Still, we think that any sensible Budget document, which is not very aggressive in its assumptions, is good enough. If the government goes aggressive on spending and does not move decisively forward on reforms, it would be easily possible that market corrects 2-3 per cent.

What should investors do — buy now, sell or enter later?

Our view is that you may get a better entry point. For a trader, it is better to not buy now. But, if an investor has a two years plus horizon and expects 15-20 per cent return, this would be good time.

What is your comment on corporate performance in Q3? Which sectors disappointed and which sectors surprised positively?

The December 2015 quarter performance showed that corporate India is not doing that great and many results were below estimates. This is especially disappointing when expectations have largely been muted. There were disappointments in sectors such as banks and capital goods, while oil and gas and infrastructure performed well. Sectors where raw materials cost savings played an important role also did well.

When do you see a corporate recovery? What will lead to the same?

We were expecting a recovery to begin by the end of FY16. Given the deteriorating performance of India on IIP and exports, this is certainly not a good sign for recovery hopes. We believe that we have to wait for at least a couple of quarters more before things get better.

What do you think RBI will do in terms of rate action?

Significantly lower agriculture production this year + Less fiscal discipline from Govt = Higher Food Inflation = Lower possibility of rate cuts by RBI.

Are some of the PSU banks good buys now?

It would make more sense to wait for a while because things will take some more time to stabilise.

Which are your top stock picks? Why?

Britannia, Torrent Power, Infosys, Reliance Industries and Coal India are my top picks. Britannia looks attractively priced after the recent correction, especially since the demand growth story is intact and margins are healthy. The Torrent Power stock has structural tail winds in the form of more visibility on plant utilisation, low gas prices and significant improvements in distribution business.

Infosys, I believe, is better placed in terms of growth among large cap peers. Reliance Industries’ core business — refining — is expected to continue to do well in the near term and the stock is reasonably priced. Coal India’s volume growth will surprise on the positive in next three years.

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