PM Modi's Assurance On Economy Soothes Market Participants Fears

Abhay Agarwal: I think it is quite refreshing to see the Prime Minister address the fact that private capital formation is important for economic growth. So if you have the target to grow the GDP by 8-9% over the next decade and get India to where it should get to, then it is very important that private capital formation has to take place which also means that investors or entrepreneurs who are helping form that private capital have to be incentivised. So I think that is a very refreshing message to everybody that the government is not going to shy away from focusing on growth and also get India into a virtuous cycle. I think that is very important because the GDP growth cannot happen in isolation. You can dream of it but how do you make it happen? So another thing in the interview was very specific points on how that growth will happen. So I found it to be a good marriage of grand vision in terms of scale, and timeline.

You know, it's not talking about the next five years or three years, it's about 25 years and the scale and also, how will that happen. You know, and we can I guess, get into the nitty gritties of that. But I found the whole messaging to be a very comprehensive messaging that should give a lot of comfort to market participants like us. More interestingly, there was one line in the interview about the tax rates and when the PM said that look, lower tax rates actually lead to higher collection and I think a lot of people will take comfort from that, you know, because there has been some worry about the tinkering with tax rates. So I think overall it's very refreshing and I think it's great that the Prime Minister did this and put out the economic agenda in an environment where politics is kind of taking over every conversation. So quite happy to hear his views as a market participant.

N Jayakumar: So he's reflecting my thoughts as well, great to have Abhay as a co-participant in this. 

N Jayakumar: So one of the best performing baskets of portfolios over the last several years now has been the PSU basket, which compares in terms of returns almost with The Magnificent Seven, or the Magnificent 13, now, in the U.S., it's almost tech kind of returns for many of the PSU stocks. There has been a disbelievers rally and it just kept getting stronger. If you look at it, the one thing that the government hasn't done adequately enough in the last five years has been the divestment targets and if their mantra of more governance, less government is to hold true, which I think they are serious on, then divestment at these valuations on PSUs also not selling the family silver cheap.

I mean, some of the PSUs are valued well, can they go up further? Possibly, Can they, you know, be good candidates for private sector people to get? I think the answer is yes. So a lot more in the divestment side can happen, especially with the kinds of stellar returns compared with the best in class worldwide. Notwithstanding anything else, I think, you know, to say that these returns are comparable to tech kind of returns is really putting them on a pedestal and there are far more stocks than in the exalted tech category. Here we are talking about 30-40-50 stocks that have given returns, this is across material, this is across defence, across oil marketing companies, etc. So my own personal feeling is that a lot more on divestment, a lot more revenue gathering on that front can happen. Everything else that Abhay has said referring to what the PM has mentioned in the interview obviously holds true, but I think a lot more on divestment will and can happen.

Abhay Agarwal: I think if you break it up into different baskets, let's say railways, for instance, the railway PSU stocks and there are four or five of them, I mean, the railway opportunity is still 10x of what we have done and we are seeing that you know despite the number of Vande Bharats and other things, the amount of mobility demand that is there, that railways has to cater to is 10x. So giant opportunity there. You look at defence and again, in the interview also a big focus on not only manufacturing, for India's consumption in defence, but also to export. I mean, a remarkable opportunity.  

I think if I look at these two sectors, and I look at these companies which have taken leadership positions in that space, consolidated industry, leadership positions already there. So I think there are tremendous opportunities in some of these specific sectors: mobility, defence, some of the other stocks which are on the Power and Financial services side. maybe they have run up because you look at REC, PFC and the valuation multiples have quadrupled in one year. You know from book value multiple of point seven, they are at two point four. So there  I would want to see more earnings growth now kick in. So I think within the PSU baskets, there are opportunities that are still there for long term investors.

N Jayakumar: So I think valuations is the first thing that you do is, you know, these were obviously very cheap. In retrospect they were even cheaper than what we thought. But I think the important thing here is the order flow because PSUs can get orders on a nominated basis as opposed to the private sector that has to bid for orders. This to an extent is limited by the government's imagination as to how many orders they can give. So as the public sector gives orders to, let's say, their brethren in the same space. These can be on a nominated basis and therefore, one of the factors that as you see research reports now talking, while seeing eloquent about is the fact that whether it is BEL or HAL, the order book has just, you know, continuing demand growth. True for Railways as well. So the two sectors that Abhay talks about are Railways and Defence, I think are governed by order book and also the kind of you know, the continuing demand which a good quality output can generate. So supply sometimes creates its own demand. So if you have great trains, people want to travel, people want to travel, word of mouth spreads. So it's not just Vande Bharat but now that it has become a poster child for the order flow here. 

On the defence side. It's completely different. There's technology transfer, there are big multinationals tying up in terms of, you know, making stuff in India, there is  Make in India, there is the PLI. So, there are a whole host of tailwinds associated with order flow. So I will just say that as long as the order flow continues, the growth here is just a function of your imagination and also, we must not forget a technical factor. Some of these still have very low float relative to any equivalent private sector player. From that perspective, as more and more money comes in here, the impact on the upside gets magnified and amplified, leading to a greater FOMO effect and greater retail demand. So I think there's a technical aspect that feeds into this, most foreign investors have been sellers in general in the market and for them to have  taken an exposure, in the Defence space is almost not there. There is overseas money that could come in and the SIP money and regular investment that the Indian public does, a combination of technical low flow and order flow that they continue to enjoy. I think there's significant more upside which may not at least in the short run, be limited by valuation, multiples etc. It will be more an ownership or a lack of ownership that will drive demand for these.

N Jayakumar: We must hand it over to the machinery if you win the nuances of some of these interviews ahead of the constituency it's addressing. So if this was the weekend when Maharashtra and Mumbai were being addressed, you know, in terms of elections, then a message which is more relevant to this constituency is being delivered. So I think whether it's gaming or the creation of cities, I think it's talking about business entrepreneurship and creation of wealth. That was, to my mind, the single biggest focus, and I think he dovetailed that technology, dovetailed that with competing or comparing more importantly with the best in the world. I think he mentioned in the interview, the fact that he's looking for the best in class, when he makes comparisons is no longer enough to say that you were X and now we are Y. So the entire focus on creating business opportunities, allowing businessmen to make money, creating wealth, and examples of that for even what was seemingly a taboo topic like gaming has been discussed openly and gaming actually is a huge manifestation of the technology  use case and the kind of participation there is from the public at large, even now with Supreme Court and High court intervention of what is legal and what isn't and what is gaming, what is betting etc.having been defined, I think we are talking about clarity coming through multiple fronts.

So there is a lot to be said for whatever he has indicated and I think from a market standpoint, all that we are looking for is continuity, whether the number is 270 plus allies or 290 plus allies, to my mind is less of a concern because I think the positioning in the market, at least as far as the foreigners who already were.have been  net short, on Hedge funds who have been under invested as the markets have distorted you know, has missed out a lot of the rally, flying in the face of that argument of the past that you know, the FIIs are the smart guys and the public at large becomes the you know, become a dumping ground. You know, completely contrary to that, the SIP approach, the call on India taken by locals who now become the mutual fund and institutional space have become larger than the foreign holders in the market. All these are testimony to the fact that there is a much longer runway that the Indian investor has played and the tactical if you will, the opportunistic, you know, Hedge fund community if you will, are actually on the verge of a big you know, short covering that could happen, once the event is out of the way. Maybe they're playing for something more drastic but that's, you know, their call, nobody I think has a feel of the numbers. But to my mind if the numbers were 275 plus allies which allows for continuity and allows for a further strengthening of policy and other measures to be taken. I think we're in for a big initial short covering rally. post the election results and country wise,if there's a massive run up pre election, which means some of this is already built in. Then there could be a correction post. But all in all, I think this is still a buy on dips market and we're hoping that the election results continue that tradition.

Abhay Agarwal: I think this government's direction towards focusing on green energy has been there for some time. So it wasn't really a new announcement, but it was still a big point made in that conversation. If you look at India, our government has been saying for many years now that we want to be energy independent. You know, we don't want to depend on exports for our energy requirements. So clearly, there is a focus that we need to cut down on crude imports and the only way that we can do it by focusing on Green Energy, whether it's Wind, Solar, Hydrogen, you know, and these efforts have been made in the past, but these efforts didn't go anywhere because they were made with a small vision, small execution, small companies because these projects require a lot of capital, whether you borrow or put in your own capital, you can't do it on a small basis. You know, these are large projects.

So I think for the first time what is happening is that scale is becoming important. So the government is focusing on the scale, that if you want to do a Green Energy project, it has to be a big project and it has to come up, it has to deliver, it has to go for full financial closure. So for the first time again, I'm seeing you know, we looked at infrastructure 1.0 earlier, you know, which didn't go anywhere a lot of companies went into NCLT and you know, they died because they didn't have the capital wherewithal, they signed the PPMs with the State governments but they didn't matter. But now what is happening is that the government is saying that look, you need to have the balance sheet strength, you need to have the execution capability, the management capability to execute these projects, because these are critical for the nation's growth. 

You know, we can't have a situation where a lot of these projects don't go anywhere, tie up everybody's resources, trouble the lenders, you know, PSU banks or whichever banks there are going to NCLT, clog up everything, so they have to be completed. So what is it that requires them to complete it? So again, the focus on making sure that whoever is a PSU or a private sector company that is doing these large projects, Solar Energy project, Hydrogen or you know, anything is given to people who have the capability. So I think that it is very refreshing that for the first time it is on execution.

Abhay Agarwal: So I think in green energy, you have to bet only on the big boys. There are no small players and I am again saying that this is about having access to large capital and execution capability. You know, both have to come together. You cannot do green projects in a small way  because of the very high risk. So you have to have the ability to take from Day Zero, commercialization and beyond that. So it is a big boys game and it has been played globally.

Abhay Agarwal: It clearly is, going by what he said and he said it very confidently and if the Prime Minister says that I think that message percolates down the bureaucracy and to everybody that do not increase tax rates, you know, widen the net, get more people in the tax system and if I marry that to his other comment about you know, expecting some big announcements, what may happen is that the net may widen by including a lot of constituents who do not pay any taxes right now. But for those who are paying taxes, I think there should be relief, there will be no negative surprises, that is my expectation now.

N Jayakumar: Inheritance, no question, but as far as the rest is concerned with lowering taxes. I just say hope springs eternal. So we'll just stay with that