There are two positive things happening: first, the government is signalling that it will do anything to boost the economy; and second, stock market-friendly personnel brought in the policy ecosystem, said Saurabh Mukherjea, founder of Marcellus Investment Managers.
“We can all opine on whether the steps taken so far are good, bad, neutral but what is clear is the government is making it abundantly clear to all concerned that whatever it is that is required to drag the economy out of the funk, we will do that. So further liberalisation, further reform measures through the winter and budget session of parliament look likely to fructify,” he said.
“The sorts of people who are being brought into the policy ecosystem are clearly premarket, stock market-friendly personnel and that itself is a very powerful signal that this government wants to take measures which will help the stock market, help the Indian financial system move forward,” added Mukherjea.
He said the macro situation looks pretty weak at the moment but the forward-looking signals are extremely attractive.
Divestment in PSUs
Mukherjea said he would not get into sock-specific betting on divestment candidates like Bharat Petroleum Corporation (BPCL), Container Corporation of India (CONCOR), Bharat Heavy Electricals (BHEL).
He said, “BHEL disinvestment sounds like a good idea given the quality of BHEL’s franchise, there will be reasonable interest.” However, he said to guess which one will make money would be a shot in the dark.
“I would much rather say buy high-quality companies to benefit from liberalisation disproportionately.”
Corporate tax cuts
When the corporate tax rate cuts took place, the top quality private sector banks and the top consumer plays disproportionately rallied and that will stay with tone and tenor of companies benefiting from liberalisation announcements over the next 12 months, said Mukherjea.
“Rather than second-guessing which fallen tiger I should go and invest in, I would much rather say we go with the Asian Paints, HDFC Bank, Kotak Mahindra Bank type stories.”
“Companies which are cash generative market leaders or those market leaders with strong balance sheets will disproportionately benefit from this bout of reform,” he added.
Mukherjea hopes that the government may come up with land and labour reforms later on.
In terms of the auto sector, he said it is very difficult to know whether the auto degrowth cycle is broken or not. Mukherjea said channel-checks by his firm show October looks significantly better than the September numbers.
For the quality of the auto franchises that we have in our country, there are highly-cash generating, well run and strong franchises and some of these valuations do look to be extremely enticing, he said.
“We are doing some positing building ourselves in the sector, so it will be unfair for me to take names but if I were to look at valuations rather than FY20 earnings, the valuations do look to be at a point where they look very attractive. That is what is leading some people including ourselves to do some position building in the auto sector,” he said.
Income tax cuts
Speaking about what his expectations are on any possible reforms from the finance minister (FM) before the end of this fiscal, he mentioned, “Firstly, land reform has to logically follow. There is no point announcing 15 percent tax rates for setting up new factories if nobody can get land in our country. Labour reforms should logically follow but it is a holy cow in Indian politics, nobody has attempted it in the last 45 years. I am not so sure what the government can do on labour reforms.”
“Given the extent of the slowdown and given the amount of corporate tax rate that is cut, not to cut the income tax rate will be anomalous. So I reckon in the budget, we will see income tax cuts and maybe pre-Diwali there might be something for the middle-class people as well. Land reform, labour reforms – perhaps-, income tax cuts and something for the middle-class people to cheer them up going into Diwali,” he saidd.