Madhu Kela, Market Veteran says in an interview with Nikunj Dalmia that if there is a correction, people like hime are fully prepared. Over the last three years, they have delinked their research from execution. Research is separate. “We have to be prepared with a price that if the price comes in this particular stock at this price, we will buy. We do not execute when we research. We execute when the price comes. So we have to be prepared. The long-term India story is fabulous. It is getting better.”Twenty years ago, to talk about the potential of the Indian economy in Indian stock markets was more like an idea. It was a minority view. But today, there is a consensus agreement on the potential of India, the way forward and why the Indian stock market deserves a pedestal position. You told me 20 years ago to bet on India. You are the man who saw tomorrow. So, what are we starting with? Are we starting with the budget or are we starting with markets?
Madhu Kela: You are the driver, whatever you want to start with.

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Over the years, even though the importance of Budget has got diluted, markets tend to use it as a benchmark to judge the future. What is your understanding of this year’s budget?
Madhu Kela: Budget used to be a very big event 10 years back when there were a lot of duty changes, a lot of policy changes, a lot of taxation changes. There used to be a lot of tariff changes in the Budget. But over the years, specifically in this government, policies change round the year. This is not a budget-specific exercise. So, from a market perspective, obviously, the importance of budget has diminished significantly. It is now lasting not more than two days of this kind of conversation.

This year, it is anyway vote on account, as they say. But I would not be surprised if it is a full-fledged presentation of a proper Budget, given that the government is confident of continuation in the next term. But do I expect any major surprises? I do not think so. The government has done a fabulous job, given the volatility in the global markets of consolidating the fiscal situation. The target of fiscal deficit of 5.9% should easily be met. If not, if we do not do better, there is a possibility that even we could do 5.8%.

The government is in a very good fiscal situation. They have controlled the expenditure. Revenues have gone up. The cash deposit of the government with the RBI is over Rs 3 lakh crore. There were no major surprises during the whole of last year. Because it is an election year, there is always that fear in the market’s mind that there could be populism in this budget. But given the track record of Modiji over the last so many years, I for one do not believe that they will go really out of the way to make it a very populist Budget.

There will be some tweaking of some schemes here and there. But I do not think there will be a lot of tweaking. And frankly, we have come to a stage when the market does not even care whether the deficit is 0.1%, 0.2%, higher or lower. As long as the policy predictability is there and the government wants to stick to the larger fiscal consolidation path, I do not think it is going to be a very major issue, even if they announce some larger populist measures, so all in all very good.

The quality of the Budget should be fabulous, according to me, given that the capital expenditure of CAGR for the last three years has been a very high 30%. I would expect, even next year’s capex to rise by 20%, at least. This is the best thing which this government has done, that quality of expenditure, while the revenue expenditure is rising by 10-11%, capital expenditure is rising much higher. And that is what we need from the government.

So, the budget is still about assumptions. Let us look at the maths, just to understand what the direction of policy is. There is no problem with the fiscal deficit number. For next year, do you see it moving closer towards 5% making a realistic assumption?
Madhu Kela: I would not say it will go to 5%, because this year has been very good from a government perspective. Again, given their track record, I do not think they will make very aggressive assumptions. They have learned that the trick to under-promise, over-perform is what really makes everything. It may be close to 5.2 to 5.4.Which is fairly acceptable…
Madhu Kela: Which is fairly acceptable I would say, with the guidance that when July, when they come back, with the guidance that 2026, they are still sticking to that 4.5% number.

After they come back, one thing which has not worked for the government is the public sector disinvestment, dividend target. That has not worked in the last few years. Either they have not met those targets or that has not been possible. So, it could be a big surprise. When we get into the next year and year after number, with Rs 50 lakh crore of market capitalisation of public sector companies and government ownership, on a weighted average, being more than 50-60% cumulative of all PSUs put together which was merely Rs 13 lakh crore.

So, the government wealth which was maybe Rs 6.5-7 lakh crore three years back has gone to Rs 25-30 lakh crore. A big delta has come there. Now, you could give a higher dividend and sell stake in companies where your holding is more than 51%, or you could strategically divest.

So, one surprise will come once the new government is formed. That gives me personally the confidence that the fiscal consolidation path has to be adhered to. This is one weapon which the government has, which they can use anytime, given how much buoyancy is there in public sector companies.

If the assumptions for tax collections, both direct and indirect, are in and around the nominal GDP – we can argue 10 or 11 or 12, the only difference is it has to be in double digit. Is that a reasonable assumption on a higher base also?
Madhu Kela: Yes, it is a reasonable assumption and they will do, they will target to assume maybe Rs 330 lakh crore of GDP for next year. It is a reasonable assumption and we are seeing that India has actually outperformed anyone’s prediction including this year.

Even RBI has come out and increased the guidance….
Madhu Kela: Yes, including the GDP prediction. I see no reason why with the policy stability and continuation of what we have been talking, I see no reason and let us not forget that the world environment isugly. Markets are very buoyant. You are talking of $34 trillion of US debt which is equal to maybe 1.2, 1.3 times of GDP. So, I think India is a bright spot in the world. There is no reason to not assume a 10-11% nominal GDP growth rate for next year.

50% of the aggregate capex has moved into roads and railways. Road capex is up 8x, railway capex is up 2.5x.
Madhu Kela: That is right.

Assuming that the capex number would be strong and it would be north of 10 lakh crore, that means road and railway will continue to get that booster shot.
Madhu Kela: Absolutely.

If that will continue, then can I say that for road and railway stocks there is a long way ahead?
Madhu Kela: I would not say for railway stocks. There is a difference between good news and stock price. Railway stocks have run really hard and that has been the best performing sector. So, there can be fireworks around the announcement of the FM speech but I would be very careful in investing into railway stocks. Let us take a view on this.

If you are a 5-year, 10-year investor, there is still a lot of value in a lot of the PSU companies. But if you are looking at the next 1 to 3 years, given how much run-up has already happened in a lot of these names, I would be very careful in investing in some of these companies.

When you come to infrastructure companies, when you come to EPC companies which are building roads, which are building infrastructure, there still we see a lot of opportunities because A) there is significant under-ownership, there is no signs of any euphoria there, valuations are still very-very attractive, the order book position of all of these companies have swelled to a to a life high, just to name like Nagarjuna Construction today has the order book of more than Rs 60,000 crore. I do not mean to recommend this stock, but we are just speaking in the context. So, there is a lot of opportunity in that basket we see, not necessarily with the railway companies.

Three years ago, Madhusudan Kela was perhaps the only or the few amongst bulls who said that I am going to buy PSUs. PSUs at that time were considered more like ugly ducklings. Nobody wanted to buy PSU stocks. Today, they are the darlings of the market. How much of the re-rating in PSU stocks is over?
Madhu Kela: I would say a lot of re-rating has happened, but one thing is clear that they are the leaders of this bull market. PSU as a basket as I gave you the number, it was Rs 13 lakh crore three, three-and-a-half years back. It is more than Rs 50 lakh crore in terms of market cap. Clearly, no other sector where the market cap has quadrupled in last three, three-and-a-half years. So, they are clearly the leaders. Was there a significant under valuation when we were speaking at that time? There was. Today, that under valuation is not there. It is a sector which is discovered.

But why I am saying that I would still be very open to buy PSU stock if I get any either meaningful correction or a good idea, like I am still very bullish on PSU banks, select PSU banks, they are still trading at 5-6-7 PE multiple one-two-year earning forward while lot of other PSU stocks have gone to 30-40-50 PE multiple.

Now, this does not go in my head, that something is wrong, either they have to go up or those stocks have to come down. So, you will have a specific opportunity within the PSU basket. I would not say that the entire PSU is a buy or a sell. However, in select names like railway, I would be very careful. If you have to put money, you should do your homework very properly and now, of course, if you are an investor, already an investor, you have to take a slightly longer-term view. I do not think a lot of money in a lot of PSU names will be made over the next one-two years.

If one looks at the numbers from HDFC Bank….
Madhu Kela: What could take the PSU market by surprise in terms of this PSU rally, let us say the new government comes and they say that we are going to make five strategic disinvestment, it has not worked till now but we are on the job, we have absolute majority and if five or ten companies get disinvestment then, it is a party time.

It is hard, but it could happen.
Madhu Kela: It can happen. If you ask my hunch, I have no information, but my judgment says that it is more likely to happen than not likely to happen.

The government has already said that they would like to be in businesses which are strategic in nature. Government’s job is not to run businesses which are not strategic.
Madhu Kela: What we know is only the price of PSU stocks. What the market does not know is the intrinsic value. Do you know what kind of real estate holding the State Bank of India will have or do I know what is the real estate holding of LIC? So there is a lot of intrinsic value in a lot of these companies. Once when your strategic disinvestment happens, look at the strategic value of the assets. That is really joker in the pack and if the government comes and shows what they want to do, then there are still legs in the entire public sector companies.

If one looks at HDFC bank numbers, the kind of commentary we are getting from ICICI Bank, everybody is feeling the pressure of deposits. The liability cost is hitting them. This is where you think PSU banks would score because they have such a fabulous branch network and old relationships. The deposit advantage will always be there.
Madhu Kela: This is what the market is showing right. Last three years, all these stalwart private sector banks were struggling. The CAGR return is below 5% in most of the big names barring one or two. But if you look at the performance of public sector banks, they were very cheap and this is the case we have discussed many times. We made the case that ownership is very high in a lot of private sector banks. Ownership is very very low in public sector banks and the valuation gap is very-very wide and given that there is 85-90% coverage ratio which has already happened, I see no real worry on the asset quality side.

We are halfway through that even though the PSU stocks have run very hard compared to private sector banks, I do not think the re-rating is fully done. And there is no sign of any euphoria here.

Can I say that the easy part of the bull market is over but the hard part of the bull market will start which could be volatility and it could be sideways movement?
Madhu Kela: Honestly there is never an easy part.

But the way you invest, you make it sound so easy.
Madhu Kela: You know but when you have to buy, you have to have a lot of conviction. I do not think it is ever easy but having said this, if you are investing, three years back the chances of risk reward was disproportionately in your favour. Today you have to be very careful in what you are investing. We are still able to find ideas and make money but obviously there is a greater risk and the number of ideas, which we are able to find are much fewer as compared with what we were able to find three years back.

A year ago we spoke about real estate. And the stocks have done rather well. Do you still like them?
Madhu Kela: Selectively yes. I am not willing to make a commitment today about what will do well in the next 6-12 months. I honestly do not know. Whatever I am buying or we are investing in is with a slightly longer term view. Think that we have to hold for maybe three years, maybe the phase of the market; today as you were saying in your opening remark everything looks so picture perfect. As an investor, I have to be careful of what could go wrong. You know what can go right everyone is talking about but what could go wrong? My base case is not that the markets will correct, but there is a possibility that it will correct and the reason no one will knock my door and say that this is the reason the market is going to correct.

The reasons will not be known but because we have made so much money in the last three years and the markets will always revert to the mean average of return. So some reason will come. Most likely it will be a global reason. But the point is if there is a correction,people like me are fully prepared. Over the last three years we have delinked our research from execution. Research is separate. We have to be prepared with a price that if the price comes in this particular stock at this price, we will buy.We do not execute when we do research. We execute when the price comes. So we have to be prepared. The long-term India story is fabulous. It is getting better.

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