February 4, 2017

Notes from Prashant Jain’s Talk after the Budget

Source: http://alphaideas.in/

Prashant Jain is ED & CIO of HDFC Mutual Fund.

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Here are the key takeaways from Prashant Jain’s talk:
His take on the Budget:
  • Its a no-nonsense Budget
  • Once GST is passed,Budget will become a simple boring affair
  • For first time in 25 years,he was able to leave office by 7-30 pm on Budget Day as there is no major policy changes in the Budget
His take on the Modi Govt:

  • It is a very purposeful and determined Govt
  • The Govt has a few priorities and all its actions can be seen from this framework:
    • Reduce the fiscal deficit: This will result in low inflation,low interest rates and more resources for the private sector
    • Increase tax revenues: Demonetization and GST leaves a trail that will widen the tax revenues
    • Stopping wasteful expenditures: Direct Cash Transfers using Aadhar and Bank Accounts have reduced siphoning off of funds
    • Improve service delivery to common man: Every scheme now has an “outcome based” approach instead of “outlay based” approach.For example,outcome of all villages electrified,133 kms/per day of roads,10L ponds under MNREGA etc
    • Simplify: Using Technology to simplify processes and doing away with redundant laws, policies and practices
    • Environment:  Supporting sources of energy like wind,solar etc
  • In the coming years, India will definitely reap the benefits from all the work done by the Govt
His take on Demonetisation: 
  • Short term pain for medium and long term good for the people of India
  • No impact on this in the next Quarter
  • Full effect was not realized due to collusion of Bankers
His take on the India Growth Story:
  • India is a secular growth story
  • It’s gowth increases every year  irrespective of domestic and global conditions
  • The reasons are as follows:
    • Demographics
    • Change from Joint to Nuclear Families
    • Low penetration of products/services
    • Faster and shorter product cycles
  • Real growth in India can cross 8% in the coming years
Why some companies are not growing despite GDP growth:
He gave example of Unilever.Said three reasons why it’s sales are stagnant:
  • Penetration levels are high.Soaps are there is most households…there are no new customers to be acquired
  • Aspirations levels are high.As the consumer’s income increases,he is not going to buy more soaps…he will use the money elsewhere
  • Competition-As new players like Patanjali come in,they take away market share from existing players as the size of the pie cannot be increased much
Two Sectors of the Economy Doing Badly:
  • Real Estate-There is a tremendous demand for real estate but high prices makes it unaffordable. Suffers from high demand,low affordability syndrome
  • Private Capital Expenditure- India does not require a power plant for the next 7/8 years.Private players in infra have been burnt badly
Macro Indicators of India are excellent:
Between FY2013 to FY 2016:
  • GDP Growth  increased from 5.6% to 7.6%
  • Fiscal Deficit reduced from 4.9% to 3.9%
  • FDI as % of GDP increased from 1.1% to 1.7%
  • Current Account Deficit reduced from 4.7% to 1.1%
  • CPI reduced from 10.2% to 4.9%
  • 10 Year GSec Yield reduced from 8% to 7.5%
For the first time in the history of India ,FDI is more than CAD.
His take on the Sensex:
  • Sensex is a very simple animal-it is a slave to earnings
  • Short term moves are unpredictable
  • Long term it has given a return of 15% CAGR in line with growth of economy
  • Foreigners understand Indian equity markets better than locals.
  • Their shareholding% of BSE 200 Companies has increased every year.In March 2001,it was 12%.By March 2016, it stands at a whopping 25% !
  • Feels Indians should hold equities like they hold gold-for 10-20-50 years
His take on market cycles:
  • Indian markets operate on the basis of cycles with clear sector leadership
  • Between 1995-2000,IT was the Sector leader.Infosys’s PE went from 15 to 300 !
  • Between 2000-2008,Capex.Banking and Commodities were the Sector Leaders. Jaiprakash Industries and Unilever India had the same market cap !
  • Between 2008-16, Pharma and Consumer were the Sector Leaders
  • When one sector takes leadership,all the money goes there and the rest of the markets become very undervalued
  • Now the time is ripe for beginning of a new market cycle
  • This new market cycle is characterised by:
    • Low inflation
    • Falling interest rates
    • Rising Capex
    • Peaking NPAs
  • The sector leaders for this cycle would be Corporate Banking,Metals & Mining and Industrials
His take on the Stock Market:
  • The Stock Market is very undervalued.
  • The Marketcap to GDP ratio is the lowest in 10 years
His take on various Sectors:
  • Corporate Banks-Bullish-NPAs are peaking,Banks are able to recover (e.g. Essar Oil).Makes an interesting point “Don’t confuse NPAs with losses.NPAs are an accounting entry,Loss is permanent erosion of Capital.”
  • Metals-Bullish-Feels cycle is turning.Both Tata Steel and JSW Steel have announced fresh capex plans
  • FMCG-Bearish-Feels low inflation environment does not favor them.Also,they are expensive
  • Pharma-Bearish-Feels they are expensive
  • Two Wheelers-Bearish-Feels their penetration is v high.Already 50% of Indian households own a two wheeler
  • Auto-Bullish-Increasing incomes,increasing aspiration and low penetration
  • Telecom-Confused-Not sure how new entrants will further act.Not possible to get multi-baggers from here
  • IT-Confused-Not sure how this sector will play out considering various headwinds
  • Insurance-Bearish.Three reasons:
    • Expensive valuations
    • GST may increase tax rates for insurers
    • India is not under-penetrated as far as insurance is concerned
  • Consumer/Lingerie-Bearish-Says super expensive trading at peak valuations
All in all, a great & candid talk by one of India’s most respected fund managers.

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