Sandip Sabharwal, asksandipsabharwal.com, says as “fiscal deficit is down, it gives RBI space to cut rates. I believe going forward, things will be much better because if interest rates come down, inflation remains entrenched and eventually volume growth on the consumption side will come back because if the economy is growing at 7%, we cannot have consumption growth at 2-3%. Eventually that will come back and that will happen next year. It gives an opportunity to buy consumer stocks which are trading at lower valuations now.”
What are you doing to your portfolio after hearing the Budget speech? Is there any change that you would want to recommend in the portfolio or just stick with what you have?
Sandip Sabharwal: I do not think any portfolio change can happen just because of the interim budget. But I think the only thing which was very positive was the 0.8% reduction in fiscal deficit. Now most people do not recognize it but it is very significant. One, a reduction in fiscal deficit of this magnitude is disinflationary. So it will reduce the inflationary impulses, give more confidence to the RBI to cut rates going forward.
Secondly, it frees up a lot of borrowing capacity for the private sector and thirdly, lower bond yields because we have not yet seen the $50-70 billion flows which the bond market is expecting after June to come into the bond indices. Once that happens, it means that the lower bond yields will get entrenched and typically lower yields are very positive for financials. Actually lower interest rates are more positive for automobiles, consumer durables, industrials and construction companies. Those are the sectors which should remain in focus.
What will these benefits by way of the welfare schemes, et cetera, are going to do for the entire consumption sector? That has been a bit of a weak link when it comes to the overall economic growth as reflected by a lot of the auto companies. How are you looking at some of these announcements and what would it mean for the sector as a whole?
Sandip Sabharwal: The social welfare schemes continue and they are more or less similar to what they were earlier. There could be some tweaks here or there. But the big factor which held back the consumption was high inflation of the previous two years, which led to a sharp spike in most consumer goods prices and as such impacted consumption.
Some sectors of the economy like IT etc. were facing employment issues. I believe going forward, things will be much better because if interest rates come down, inflation remains entrenched and eventually volume growth on the consumption side will come back because if the economy is growing at 7%, we cannot have consumption growth at 2-3%. So eventually that will come back and I guess that will happen next year. It gives an opportunity to buy consumer stocks which are trading at lower valuations now.
Just wanted to get a sense from you as well as to what the expectation is come July with respect to what we could anticipate from the government. Do you think any full-fledged announcements or it will be largely an extension of a lot that was announced in today’s union budget?
Sandip Sabharwal: I think going into July, on the positive side, expectations could be some relief on the income tax front because tax rates have been kept high for a long time because of high fiscal deficit. On the negative side, there are expectations on some tweaks on capital goods, some sort of inheritance tax, etc., coming. So hopefully those things do not come.
Last year, it was all about urban consumption, and the kind of K-shaped recovery and the luxury kind of the market, which was doing well. This year, do you think on a risk reward basis, it is better to have your portfolio more skewed towards rural, cyclical, the likes of, cement, even other rural plays like base, staple, FMCG, etc?
Sandip Sabharwal: I think consumer names like FMCG, many of those companies are trading at relatively more near 52-week lows rather than 52-week highs when the market is at a 52-week high. So risk reward is much better because as I said earlier, I expect volumes to improve going forward that could directly percolate down to the sentiments around those stocks. Many of the consumer durable stocks are also subdued. So I think there is an opportunity there. I believe autos will continue to do well. And that is one segment which continues to do well.
Is it time to book your profits out of those luxury names which are doing well? I am talking about Ethos and the winemakers of the world and those high end luxury names that were doing quite well, even Titan for that instance.
Sandip Sabharwal: Many of these companies have proven themselves over a long period of time. I would not go out and buy Titan at this price. But if someone is holding Titan for several years and it has been such a consistent performer, do I tell them to sell at this price because one quarter or something they do not do well, I would not say that.
So if you are holding, you keep on holding such companies because the longer term growth prospects are good. But for someone who wants to buy now, I think the valuation might be excessive. So you wait it out and wait for corrections and invest in them.
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