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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