Expect corporate earnings to see some weakness in near term: Rashesh Shah, Edelweiss Group

In an interview with Kshitij Anand of economictimes.com, Rashesh Shah, Chairman & CEO, Edelweiss Group, shares his views on the Budget and the market. Excerpts:

Q) How would you describe Arun Jaitley's Budget in one word? The consensus view is that this is a pro-growth Budget, but markets do not seem to be all that excited.

The Budget certainly is growth-supportive given that fiscal targets have been relaxed marginally to create space for infrastructure spending. Similarly, from a medium-term perspective as well, the Budget scores well – a push to GST, cooperative federalism, new monetary policy framework, bankruptcy code etc – all are much needed reforms for securing medium-term growth. Now execution is the key. As regards the markets, several factors could be weighing on investors’ mind, the latest being the fear of Fed rate hike or legislative hurdles which the government is facing in Rajya Sabha.

Q) Market has rallied quite a lot, over 30% since Narendra Modi became the Prime Minister. Do you think the much-awaited event of the year 2015 failed to create the ‘wow’ factor?
As I mentioned, the big picture of the budget is certainly constructive. But meeting sky-high expectations is always difficult. In my view, the government is trying to take several incremental reform-oriented steps to mend the economy rather than going for big-bang politically difficult reforms.

Q) What were the top five initiatives or factors that Arun Jaitley mentioned in the Budget, which could really make India a better place for investors?
Apart from giving an infrastructure push (through direct spending, setting up national infrastructure investment fund), the budget also states several institutional reforms. A push to GST by providing compensation to states for CST reduction, direct cash transfers, bankruptcy code, glide path of lower corporate taxes, institutionalizing new monetary policy framework, steps to boost financial savings etc are clearly laudable initiatives.

Q) India has largely been a consumption-driven economy. Sectors such as auto, consumer durable and FMCG have done well mostly in the past. Do you think with the 'Make in India' initiative taking pace, infrastructure or economy-driven stocks will lead the next leg of the rally?
Capex recovery may take some time, especially the private sector capex, given the large idle capacity in the manufacturing sector and high indebtedness in the infra space. While private sector concerns get addressed, the government’s infrastructure push, and improvement in real income of a household due to falling inflation will be key drivers of recovery.

Q) The Budget had something for everybody - right from middle class to corporates. Anything you think was missing in the Budget?
The government has not adequately addressed the issue of PSU bank recapitalization. Affordable housing perhaps could have been given more focus. But other than that I would look for execution of whatever has been proposed in the budget.

Q) For the longest time, most experts have been making a point that India needs to kickstart the broken down investment cycle, focus on increasing capital expenditure, etc. Do you think the Budget has done enough to take care of that?

The Budget has certainly provided a push in this direction. Remember, after Finance Commission recommendations, the discretion of the Central government in deciding where to spend has come down. But yes, the government cannot be the sole driver of capex cycle. Therefore encouraging private sector through better regulatory framework, enhanced ease of doing business, easier land acquisition norms, certainty on tax front etc is very critical.

Q) How do you view the tax proposals in the Budget 2015? There is a move to cut corporate tax over a four-year period, and a move to hike service tax. GST will be introduced on April 1, 2016. What is your opinion on these moves?
Reducing corporate tax rate while eliminating exemptions is clearly an attempt to simplify tax structure and increase compliance. But we still don’t have the crucial details. In what steps will the tax be reduced over next 4 years is unclear and what exemptions will be eliminated also remains to be seen. As regards GST, the government has definitely given it a push by providing compensation to the states, hiking service tax rate. Indeed readily accepting the recommendation of Finance Commission for high devolution of taxes to states will reduce the trust deficit between the Centre and the states.

Q) Any top five sectors you think will hog the limelight after the Budget. Do you think these sectors can produce the next set of multibagger stocks?
I would say the construction sector should definitely do well given the government’s focus. Besides, autos (four wheelers) and banks are most suitable to play the cyclical recovery

Q) Investors would really want to get your view on stocks that you like from a long-term perspective. Share with us your top five or ten stocks which investors can have in their portfolio for a period one year or more.

We like Axis Bank, Yes Bank, Maruti, Havells and Bharat Forge, amongst others.

Q) How bullish would you be on the earnings trajectory over the next 12 months, considering the fact that a lot of stocks have rallied ahead of fundamentals? Do you think the Budget had enough to propel the earnings cycle of India Inc?
Earnings may see some weakness in the near term and we may see some further downgrades. But once the economic upturn firms up, earnings outlook will certainly improve.