Mahesh Nandurkar, Head of Research & MD, Jefferies, says “there is going to be some continuous allocation of money away from expensive consumer names to some of these capex and real estate and other interest rate sensitive sectors and that is a much longer-term theme that we have to keep in mind. So, while the rural sector will bottom out, I would still be more optimistic on the cyclical side of the stock markets.”From the Street point of view, how much would you give this Budget out of 10?
Mahesh Nandurkar: First of all, I would say that this was an important Budget. The word interim or the word vote on account is just a technical term. But it is a budget to watch out for, in my view, because historically also, in 2019, there was hardly any difference between the interim budget numbers and the final budget that was ultimately presented.

Also, if one assumes that the same set of people will be presenting the next one, it would be very difficult to deviate from the February budget. So, I never took this budget lightly, I always looked upon it as the budget, maybe some small tweaks can happen here and there, but I think the broad pathway that would be set out in this budget would be the one that would continue post elections as well, so that is the first point.

The second point as to how I look at this budget, I think it was one of the best budgets in the sense that given the environment that we need to undergo fiscal consolidation and the government did an excellent job on that. In fact, they delivered numbers which were better than market expectations on the fiscal consolidation front. The market was expecting about 5.3-5.4% and what they have targeted for the next year is actually 5.1%, so much better than what market expectation was.

Even more than the fiscal consolidation, what I find the single most important point from the Budget is the balance between the expenditure growth. On the capex side, the growth is almost 16-17% on a year-on-year basis and on the non-capex side if you exclude interest payments is actually a decline of 1%.

So, clearly, the government has told us the direction in which they want to move and in a pre-election budget like this the split is plus 17% for capex and minus 1% for non-capex, you know what lay in store for you over the next few years if the same government were to come back and I think that was a very-very important messaging from my perspective. We have been quite positive and quite optimistic on the whole capex cycle to start with and this budget really comes across as a music in that context. With the budget that was presented yesterday, the government has endorsed that market view, I would say.

What is your stand as far as the capex number is concerned? In the last four-five years, the run rate was anywhere between 30% on average, this time 11% appeared slow. But the other camp believes that the base in the last four-five years or the peak of COVID lows has actually expanded a lot, so even 11% is a very healthy sum or record high, 11 lakh crore or there about. How meaningful does it appear to you and do you think it is also an indication to corporate India that it is about time that you may also want to loosen your purse strings towards capex?
Mahesh Nandurkar: Yes, actually, just to be correct on the numbers, it is actually not 11%, it is 17%, that 11% is from BE to BE. But if you look at the revised numbers that have come up for 24, from those revised numbers, it is actually 17% up. So, the capex growth is not 11%, it is actually up 17%, so just to be correct on the numbers.

I think that is a very meaningful number because as you mentioned, while over the last four years or so we have been seeing a 25% or 30% kind of a growth, but that was on the relatively lower numbers. But now on a higher base and we are looking at a 17% growth, that is a meaningful number. Mind you, we are also looking at this number in the context of fiscal deficit actually going down by… sort of budgeted to go down by 80 basis points. And in that context, the 17% growth number looks very attractive to me. As I said, it is not just this budget, I would actually extrapolate this strategy of the government over the next five years if one assumes that the same government will be coming back and it is a clear message that it is the investment cycle which the government wants to encourage.

It is the broader investment through infrastructure and manufacturing and so on is what the government wants to encourage and the equity market investors clearly need to take cognisance of that.

From an equity standpoint, where is this year headed? While the market is doing what it is doing, FIIs continue to evade us. There are two big events, US elections as well as our very own elections. You have got another budget lined up as well and this is in the backdrop of all the geopolitical tensions which are continuing to spiral up.
Mahesh Nandurkar: Over a period of time, we have got a very strong set of domestic investors as a large asset class which has now been supporting the markets. I agree with you that over the last couple of years in general, we have not really seen meaningful inflows from the foreign investors. I still continue to believe that this year will be the year when the dollar peaks out and there will be rate cuts by the Fed and we are talking about a number slightly lower than that.

In the recent communication, the Fed seems to be giving a message that we should be lowering the expectation of a rate cut in March 24. So, some changes might happen here and there. But still, the central messaging is that whether it is 150, whether it is 125 or 100 or something, there are going to be rate cuts in the US and I clearly believe that that will mark the peak of the US dollar and would be an excellent environment for emerging markets as an asset class to do well. So, I continue to expect meaningful FII flows this year.

Last year we got about $20 billion, but according to me that is a very small number and I will not be surprised if we actually see inflows from the foreigners which will be a multiple of that number, that still is my base case. So, yes, the markets have moved up, but if I go with the current investor positioning of foreign investors in India, which is very light and in the context of this expected weakening of the US dollar, I do expect strong foreign flows and I do not see any reason why the domestic flows should weaken. So, my sense is that we are still looking at a decent 12% plus kind of return for the broader market and obviously some sectors, especially those geared towards capex and some interest rate sensitives will actually do much better.

I see that you are incrementally negative on the rural side of the plays, whereas the commentary from Godrej as well as Dabur seemed to be suggesting early green shoots in that zone. Now this entire part of the market which is sensitive to volume growth and margin, etc, got hit by inflation issues. Does it seem that worst is priced in there or could it drag longer?
Mahesh Nandurkar: Selective names will definitely do well. But when we talk about underperformance or when we talk about the Street not acknowledging these numbers, we have to look at a slightly more historical context and not just limit ourselves to what has happened in the last one year.

We have to look at a starting point 10-12 years ago. In 2010-12, many of these consumer stocks were trading at 20 times, 22 times one-year forward earnings. They went all the way up to like 60-70 times and we have seen some valuations correction towards 50 times multiple or thereabouts. So, yes, there will be a bottoming out of the rural economy because if you are looking at a positive outlook for the capex sector, the construction sector, it is ultimately the rural labourers that would be seeing the ultimate benefit of it.

I have no doubts in my mind that the rural economy will bottom out, I mean, at some point in time. But the re-rating that we have seen in many of these names over the last 10 years, going up from 20 times to like 70 times, that needs to kind of retrace, especially because one large segment completely ignored by the investors for the last decade is now coming back into focus. So, there is going to be some continuous allocation of money away from expensive consumer names to some of these capex and real estate and other interest rate sensitive sectors, so that I think is a much longer-term theme that we have to keep in mind. So, while the rural sector will bottom out, I would still be more optimistic on the cyclical side of the stock markets.

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