Mihir Vora, CIO, Trust MF, says “it is a sign of a maturing and matured economy that the Budget is not a big deal anymore. GST which is a big component of tax collection is anyway outside the budget, the GST Council decides that. And corporate taxes and all the other personal taxes, slabs have been rationalised and the government anyway wants everybody to move to the new regime which is far more simpler. So, there is not much tweaking left in any case. It is not like the old times where you had to wait for import duties on specific items to be changed.”

Are there any expectations from the Budget this time?
Mihir Vora: The Budget being an interim budget should not have any major shocks, but it will be interesting to see how they balance the imperative to trim the fiscal deficit to as close to 4.5% which is the glide path that we have to show especially given the fact that this is going to be the year in which Indian bonds get introduced to the global bond indices.

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But she will still have to give a number for FY25.
Mihir Vora: Yes, absolutely. So, my guess is about 50 basis points reduction in the fiscal deficit will be shown.

So, 5.2%?
Mihir Vora: It should go from 5.8-5.9% to about 5.4, 5.5%

5.3-5.4% is the general view.
Mihir Vora: Yes, 5.3-5.4% is the number they should show. Revenue expenditure may not again grow that much but given the fact that this is an election year, it is going to be a fine balancing line because for the last couple of years they have not grown revenue, they have kept subsidies under control but there is rural stress. On the other hand, capex has been doing very well and we are all enjoying the benefits of the big spend in capex, which probably may be curtailed. Let us see how the balance spans out.

But their tax collections have been very buoyant.
Mihir Vora: Exactly, yes and that is the reason why they have been able to spend on capex.But the finance minister will have to spell out a few basic assumptions for fiscal deficit for FY25?
Mihir Vora: Yes.She will have to indicate what the expenditure plan would be, capital expenditure, and what is her assumption for direct and indirect tax collection or revenue collection for FY25.
Mihir Vora: Absolutely.

Those are important numbers.
Mihir Vora: Absolutely and my guess is they will work with a nominal GDP growth rate of about 11-12% and while direct tax collections have been very healthy this year, indirect tax collections are not that great. So, it is basically direct tax collections which have been buoyant. FY25 may not see as much growth in direct tax collection because we are working from a high base. Indirect tax collection should improve. So, there again the composition may change. But my guess is it will be 10% growth in most of the expenditure items and the revenue tax collection…

And that is good for the market?
Mihir Vora: That should be good enough for the market. I do not think we are expecting too much frankly.

But would it have a populist tone? Will the government try and bump up the rural end of the economy which has been beleaguered?
Yes, absolutely. That is what I was saying. They have not been spending so much on revenue and subsidies in the last couple of years, but this is the election year, so we might see some, for example, the PM Kisan is an important scheme. The Pradhan Mantri Awas Yojana may be rolled out for rural poor also and so those kinds of schemes. It may not be huge but directionally and at least from the tone and tenor, you might get to hear some expectations. They might do something more on water because that is again a critical focus area. So, those social schemes may be expanded this year.

Do you think revival of consumption is going to be a key theme since you are talking about things like rural?
Mihir Vora: Yes, absolutely, especially as it is an election year and they would want to have some feel good there.

If there would be an indication on assumptions, which is direct taxes, indirect taxes, fiscal deficit, capital expenditure, subsidy spend, then it is almost like a full Budget and what else normally comes in a full budget? These are the four-five data points.

Mihir Vora: Yes, but you may not have major tweaks in the tax structures or people expecting something on capital gains and stuff like that they might leave for August….

Who is expecting it? I do not know, who is expecting?
Mihir Vora: I am always wishing for a reduction in personal taxes.

Really? I mean somebody is expecting it. Who is this person I want to meet?
Mihir Vora: Yes, so nothing big bang I guess in terms of tweaking of taxes.

So, what does that mean for the market? It could turn out to be a budget which could be called a no-harm budget. Everything remains in terms of status quo, markets get everything they are expecting. The market has not seen a wild pre-budget rally or a pre-budget selloff because of any concerns. So, Feb 1 Budget gets over and Feb 2, will it be back to square one?
Mihir Vora: It is a sign of a maturing and matured economy that the Budget is not a big deal anymore. GST which is a big component of tax collection is anyway outside the budget, the GST Council decides that. And corporate taxes and all the other personal taxes, slabs have been rationalised and the government anyway wants everybody to move to the new regime which is far more simpler. So, there is not much tweaking left in any case. It is not like the old times where you had to wait for import duties on specific items to be changed.

Mehnga sasta (What is costlier & what is cheaper), remember that was a common graphic.
Mihir Vora: Yes, yes, exactly. So, excise duty tweaking and all those things are gone.

Cigarettes are expensive but bidis are cheaper, those days are gone. But I think more than the Budget now, the positioning of the market is towards the elections and the proof is in the reaction that we had post the state elections.
Mihir Vora: The markets already seem to have given the verdict on the elections….

Exactly and why not because look at what happened with Nitish Kumar over the weekend. It is only making your case stronger that it is going to be a very fragmented opposition.
Mihir Vora: Absolutely. So, markets are already discounting the continuity of the regime. And so, it is back to global economics and our own initiatives on various fronts that we are looking at.

And let us also talk about the positioning of the foreign institutional investors in terms of what the expectation is for the year ahead, election year, budget, etc. Can we lean on support from the FIIs?
Mihir Vora: Yes, I think so because there was a risk to the environment a month ago, but now it is back to risk-on globally too and India is expecting bond fund flows also. So, the currency hopefully will remain stable. If you got good interest rates and a stable currency, then my guess is FIIs should come both in equity and fixed income. Anecdotally, I am building a team and I can sense that there are lots of FIIs looking to hire analysts and fund managers because I am hiring, so I know who I am competing with.

So, there are funds who are coming to set up an India desk with two or three people. So, there is definite interest in India, especially given that now we are looking for an India-specific fund regime. Earlier, it used to be global funds or GEM (Global Emerging Market Funds), who used to invest in India, but now it is coming back to India-specific funds also. I can see that interest in India for the long term.

That interest is definitely not coming back to the financials. And rightly so. The earnings are proof of that, be it an HDFC Bank or Bajaj Finance yesterday, wherein the asset quality has marginally deteriorated and pressure coming in from personal loan slippages.
Mihir Vora: It is a bit of a cyclical issue and we have seen time and again that banks and NBFCs are the smartest people, they will maintain their margins ultimately. If not this quarter, next quarter, if not, then quarter after next. I structurally do not see a squeeze in margins. It is just that the RBI has kept liquidity tighter than what was expected. So, to that extent, it is more a function of the tactical stance that the central bank has taken, which is kind of impacting margins. Otherwise, I do not see a structural issue, frankly.

If we are talking about 7% GDP growth for FY25, then credit growth has to be 15% and then, of course, the smaller banks, private sector banks and NBFCs will grow faster. I do not think that the thesis has changed except for some pockets. As the RBI has rightly mentioned, in retail loans or unsecured loans, there might be some stress. But as a part of the overall system, it is nothing to worry about.

So, you are saying that long term money should find value at these levels after the correction that has played out in private banks?
Mihir Vora: Absolutely. Indian private sector financials are some of the best managed financials in the world, whether it is in terms of technology or branding or product mix, I think, they are pretty much there.

For markets to significantly go higher, I am not talking about like what happened yesterday, that was more like a technical adjustment, let us say 10% or 15% higher, what could be the trigger? Election verdict is already in the price, Budget is a non event. Globally inflation peak is behind us. So, what could push markets higher by even 10% from here?
Mihir Vora: It is sheer earnings growth. We are expecting 15% earnings growth for FY25. That alone should take the market to at least high single digits and if the consensus veers towards GDP growth of say 7% plus, then probably we can see some more upside if there are upgrades. Otherwise, so many sectors have still not even reached their pre-Covid level.

For example, auto is now reviving, but if you look at the auto unit numbers, they are still only a little above pre-Covid level, so we really have not done in a lot of sectors that much. There is a lot of consumption catch-up to be done, frankly, I would say. Real estate again has started performing now, but there was a long period of underperformance and lack of volume growth. So, there are a lot of sectors where we still have steam left.

Sectors which have not reached pre-Covid, still have headroom left, autos, pharma, but there are a lot of sectors which are way above pre-Covid, PSUs, railways, defence. What happens there?
Mihir Vora: We have to look for IT also. In each of these, we will have to look at sector by sector. In IT, for example, I would be a bit cautious, because relatively speaking, the domestics should do better and as we said, IT is far above the pre-Covid levels and probably the best of the growth that we have seen in FY20 to 23 was, is not going to be seen at least for a few years.

But in terms of defence, railway, etc., these are paradigms which have emerged only in the last two years. These companies were always there, but the policy has changed. So when you are talking about policy change, you do not even know what the total addressable market is, whether it’s only the domestic market for replacement and Atmanirbharta or we are talking about global exports. If we are talking about global exports in this segment, then the total addressable market (TAM) can be much wider. Right now, the stocks are probably running a bit ahead without visibility, but that typically happens in high growth segments.

Given that there is so much optimism about generative AI, etc., and you are looking at online B2C, you are saying that is an important sector?
Mihir Vora: B2C, I think, the broad thesis is that intangibles, branding and technology will form a larger and larger part of the market cap. In the US, 40 years ago, 80% of the market cap or EV of the stock market used to come from physical, tangible assets. Now it is the other way around; intangibles are now 80% of the EV.

Similarly in India, even the Nifty, for example, financials, IT, pharma, FMCG will all be 60% plus of the market. These are asset-light models. So intangibles, network effects, AI, those kind of things will continue to have a bigger impact on the market and these are the segments which are here to stay.

There might be winner-takes-all kind of a situation where in each of the segments, there will be only one or two players, but that’s the way it is going to be.

Do you think energy is the space to be in right now? Already some of the stock prices reflect that. What with the move on in ONGC and Reliance, though Reliance is not a pure play energy business at all? Does one need to have it as part of your core portfolio? I would include power as well over here.
Mihir Vora: Power I would treat separately but I do not like the energy sector. It might look cheap and we might play it tactically from time to time, so do not hold me if it is there in the portfolio but it is not a structural bet, it is a cyclical bet.

Sometimes it is a valuation catch-up game and sometimes it is probably a small momentum play on oil prices. Problem is that it is a heavily regulated sector and margins will be controlled if they go out of whack. So ultimately, you cannot give very high valuations to segments where there is good guarantee of government interference from time to time. So I would not value them very, very highly. Power probably is a different segment where we are really facing a shortage and these are good manufacturing companies. There the growth rate and the path through growth may be a bit longer.


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