Nilesh Shah, MD & CEO, Envision Capital, says “the real test will be post-May because post-May I think what will really happen is that FIIs will see India now as the next place of stability for another five years. And that is when the big money can actually come in. The big thing to keep in mind is that India, unlike China, is still part of an EM allocation. It is not yet a country allocation. While China became a country allocation long back and that brought in billions of dollars. India has yet to get to that stage and I do not think that day is too far away.”

Some would say that the fiscal deficit is coming down because the government would be spending less or collections would be high or the government is looking at reducing the capital expenditure. Those are the only two ways you can come to this number of 5.1%. Is this good news for the market and especially for defence, railways and other sectors?
Nilesh Shah: It is good news clearly because what the market wanted was fiscal prudence. Look at the expectation that this is an election year, the government is going to be populist but it has not been populist at all and prudence has taken precedence over populism. So 5.1% is the big picture and that I think is a remarkable number. The fact is that the outlay on public capex is still at 11% on a base which is so big. The base itself has expanded because the government spending on public capex has gone up at least at 20% year on year for the last four years since FY21 and on that base, to have an 11% hike is quite phenomenal. That 3.4% spending as a percentage of GDP itself is double versus where it was a decade ago. So look at it from those points of view and it is quite phenomenal.

I think the government has played the role of a Pied Piper by first making the investments. Now the acceptability of the sector is increasing and you are going to see private capital come in and invest in the infrastructure. So may be the government spending at 20% growth is not required but the fact that they spend 20% year on year for the last four years and now is still spending 11% is going to attract a lot of private capital to the infra space and that is where there is prudence and pragmatism in the government’s approach and the government’s outlook and I think from that point of view it is a perfect situation to be in.

Heritage Foods, Mahindra Holidays, Home First. Nilesh is always about consumption. Home First is a new one though, right.
Nilesh Shah: No, it has been there. We have been owning it for some time now. But clearly I think in this Budget also, there was a very strong focus on mid-income housing. Clearly Home First is at the forefront of that. It is a high quality lender. It has been very capital efficient. Credit cost contained. Has been using technology to essentially reach out to the consumer segments and evaluate credit. And therefore, on the whole, this a new age company in a conventional business.

What could be a multi-year tourism bet?
Nilesh Shah: My view would be, we already own Mahindra Holidays which is partly tourism or hospitality. I do not think there is a direct way to play tourism, but indirectly you pay for it by owning a bunch of hotels, a bunch of resorts, airline companies, online travel aggregators.

Which one do you own?
Nilesh Shah: No, we own Mahindra Holidays for now. We used to own Ease My Trip sometime back, but we have exited it, but we continue to own Mahindra Holidays. We have been owning it for a while now and we still continue to like it. I think there is tremendous potential for it. For the cash flows to keep building and adding on to their inventory of resorts so I think it is wonderful.What is happening in the bond market? Have I said all the correct things for PSU banks?
Nilesh Shah: Absolutely. Totally.

Have I convinced them to buy it with this pitch?
Nilesh Shah: But the path to fiscal consolidation has been underway. It will continue for another year or two and that is when they basically become the biggest beneficiary, it is actually one of the hedges against any NIM compression that they may have. Two, who knows, post the elections, IDBI bank is already scheduled for privatisation. If that happens, it could be the next trigger for a re-rating of PSU banks.

For the last five budgets, we have been saying that something big will happen in divestment. This time we did not use it only. I think markets have given up now.
Nilesh Shah: Yes, so that is the great best time, right. Is not that the best time when we all give up that is probably, I mean, from an equity market point of view.

And their valuation is so perfect.
Nilesh Shah: Absolutely.

It is the best that the government could come up with.
Nilesh Shah: I mean, a year-two years back, everybody had given up on the PSU pack but look at the rally in PSU stocks. I think things happen when you probably expect them the least.

But what is keeping FIIs away?
Nilesh Shah: No, I think for them, there are two things. One is their own home markets are also doing well enough. If you look at maybe the NASDAQ or maybe the US equity markets over the last one year itself has done very well.

Second is not till December, but at least prior to that, they were waiting for essentially the May election outcome till the state elections did not happen. The state elections, of course, have basically converted some of the fence-sitters. But I still believe there are some who are sitting on the fence as yet and will still want to wait for maybe the May election outcome.

Third, of course, is the whole geopolitical risks and the expectation that that will impact rural prices and therefore that will impact India’s trade deficit and inflation and all of that. So there are these whole set of factors which are pulling them back.

Lastly, but most importantly, I think some of them are still evaluating whether China continues to be a better value play because China has underperformed so much. It has fallen so much. It looks a little unbelievable that they have not managed to pick it up till now. So maybe China markets trade probably in high single digits. India trades north of 20 times. So some of them are really trying to take that view that do you want to probably overpay for certainty or you kind of want to buy something at a more attractive price where there is uncertainty, but it will probably… So I think these are a whole combination of factors. So I do not think it is anything against India that they think that they need to sell or not invest but I think it is just a bunch of these things which are still probably holding them back.

The real test will be post-May because post-May I think what will really happen is that they will see India now as the next place of stability for another five years. And that is when really the big money can actually come in. I think the big thing we have to keep in mind is that India, unlike China, is still kind of part of a regional allocation. It is still part of an EM allocation. It is not yet a country allocation. While China became a country allocation long back and that brought in billions of dollars. India has yet to get to that stage and I do not think that day is too far away.

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