Three sectors to benefit from Modi’s budget moves: Sunil Subramaniam, Sundaram Mutual

In a chat with ET Now, Sunil Subramaniam, CEO, Sundaram Mutual, says rural economy, infra and banks riding piigyback will benefit from the budget thrust of the government.

Edited excerpts:

The union budget is expected to be one of the big triggers for Dalal Street on 1st of February. Sky high expectations from the finance minister, be it about tax cuts etc but also about rural India getting a fillip and priming of the economy on the back of that. Are you bullish on infrastructure, rural India oriented stocks?

Absolutely. The budget has got fiscal room for the government to play around with. Where are they going to spend that additional money? There are three factors to it; a) the biggest challenge for the government is employment generation over the two - three years. So, mega projects supporting employment generation in a big way will be a focus.
b) The rural sector partly because the two big states going to the elections -- Punjab and UP. Both are agrarian states so while they cannot do state specific announcements anything that they talk about on agriculture is going have an immediate impact on those two states in terms of the election.

c) The third thing is the government’s strong urge to make the demonetisation look successful. If you look at it from that perspective, they will definitely want to do a wide ranging set of stuff which partly Mr Modi announced on December 31st but they will carry through that momentum and there will be a lot of positive impact on a number of sectors. Both rural economy and infrastructure are positive but the third one which rides on the back of both these sectors is the banks and financial services space.

We think that is going to benefit both from the rural transformation and from the infra pick up.

But would that be a short term gain? We still have not taken care of the NPA problem. Also, do you have a preference between the private sector and public sector?

The reason I am bullish on the banks, is not so much the short term demonetisation driven liquidity surge in the banks; it is more from the fact that we believe that the demonetisation actually brought to a halt the positive growth which the economy was otherwise experiencing from three factors. These are: increased government infra spend from the last budget into rural roads, into rural housing, into NREGA schemes, one. Second, was the Pay Commission which from August onwards started disbursing money into government employees’ salary accounts and the third was the benefits of a good monsoon. All these three factors, unfortunately because of the November end demonetisation affected the consumption story sentimentally. This quarter and the next will probably see the subdued levels but starting from the festival season this year, all of that cash which is lying in the bank is now going to be put to use in the consumption space.

We believe that this time around it is the financing of these which is going to drive it. So our positivity on the banking space comes from the fact that the rate cuts are going to help lending demand boost. The short term impact is the liquidity of the demonetisation but on longer term as the consumption story unfolds, private banks and private financing companies are probably going to be the biggest winners.

From a public sector bank perspective, the valuations of good quality banks have been impacted due to NPAs but they are the ones which are the major beneficiaries of financial inclusion, Jan Dhan Yojana and demonetisation drive. They are the ones who have been aggressive in announcing the lending rate cuts so even there we see that good quality public sector banks are probably going at good valuations to pick up.

What is the expectations from the overall market mood? Does it seem like we could just be extremely in a narrow band, extremely range bound, sideways sort of trade light ahead of the big event kind of move is what we could see from the markets ahead of the budget and then of course the month after you have got the Uttar Pradesh elections as well?

Yes, the February the budget, March 11th the election results and in the middle of all of it Mr Trump taking over and spelling out his economic and financial policies. will lead to valuation related uncertainties in the short term.

You are likely to see a range-bound market for the next two to three months but starting from the second quarter results onwards, we expect both the earnings and domestic inflows into the stock market to increase because SIP flows continue to be strong.

The government is also given the reducing interest rate scenario allowing increasingly the provident funds to allocate more money to equities so I think domestic demand for equities overall is going to also keep the valuations at a fairly reasonable level.

The other word is on real estate. Unlike popular belief that because of remonetisation real estate is going to take a hit, stocks are doing something completely different. Does it seem like real estate for 2017 could be what metals were in 2016? Everyone completely shrugged off the sectors and then because they were just so beaten down, hopes were completely low in terms of the fundamentals these have turned out to be the best performers for the year”?

We do think so because the demonetisation impact on the real estate sector is there in terms of the land deals and the cash based deals coming down dramatically but you have got to remember that in the stock market, in the listed space the kind of real estate companies that are there they have largely moved into a wide cheque based borrowing based kind of a demand boost.

All listed players in the real estate -- their component of the cash based sales -- was anyway not very great. If you look at it now with the trend of rate cuts going on, we do expect the excess stock in the real estate sector to slowly start getting absorbed. Of course the first move from the banks on this will lead to reallocation of housing loans from the old loans getting transferred into newer banks but sooner or later you are going to see, more borrowings.

We think that listed real estate companies actually those who are in the housing kind of a space are going to see a very good demand for their products starting from the second half of this year and I think the market is beginning to discount that.

And the reason their current results are not reflecting the big drop because like I said they are not so much into cash based dealings as the listed companies.

I am not going to be as convinced as yet because you know the Benami Act also has to be followed up with. We are going to see a lot of action and crackdown on realty transactions. The sentiment may just affected. But what about the auto pack? Auto sales have been among the lowest in December. Are you expecting that to bounce back even if it is post budget?

Not immediately, I would again say second half of the year because autos are a rate sensitive pack. As rate cuts happen -- whether they are commercial vehicles or cars -- borrowing is the key element of demand. In the declining interest rate scenario, car sales will definitely see a boost in the second half of the year. Right now in the short run, because the metals prices are rising you will probably see a little more impact on their margins because steel is one of the biggest components in any automobile.