Markets Evolving But Taxation Still 'Abysmally Low', Says Enam Holdings' Sridhar Sivaram

Sridhar Sivaram: If you see, India's currency has been the most stable one within the emerging markets. Even when you look at say, something like Korea or even Taiwan, India has been relatively very stable over 18 months, I would say.

So I think some bit of what is happening with the Japanese Yen is resulting in course correction. There has been a rate cut in China and that has an impact on the currency there. So I think there are a lot of moving parts here, but I would say that the currency markets have been very stable.

The bond markets also have been reasonably stable. I mean, you know, there will be some ups and downs in the bond market based on, you know, there was news about inclusion in the MSCI, then there were some adjustments based on the Budget when the borrowing numbers were reasonably stable.

So I think there are a lot of moving parts, but I don't see any worry here, as we speak.

Sridhar Sivaram: I would say, a combination of both. So, if you look at the absolute fiscal deficit, it has been lower for the last two Budgets. So it's not the percentage. It's not the optics. The actual number is lower. And we've been guided below 4.5 for next year, so I assume at least 4.4. So, the glide path looks extremely good.

Obviously, it means that the absolute borrowings would also come down from the government. So I guess it's a combination of all these factors. Plus, there is a hope that, you know, in possibly nine months, we'll start to see some sort of rate cuts. I don't see it happening immediately, but once the US starts to cut rates. We are seeing that China has been cutting rates aggressively and once the US starts to cut rates, there'll be some pressure to normalise the differentials.

So I guess these are really complex, macro frameworks that we're seeing right now. I mean, who would have thought 50% depreciation to Yen and nothing happened to global markets. So I guess these are the new age of, you know, digesting news every morning and trying to figure out how to interpret some of these.

I would say, broadly, Indian macro looks good. I do not have any worries. I think the central bank has done a reasonably good job.

Sridhar Sivaram: See, I'm not an expert on the US. But when I speak to my ex-colleagues in New York, the sense I get is that we'll at least get one and possibly two this year.

From where we were, I mean, you go back to say early February, there were expectations of three or four cuts. But as we've seen that inflation has been sticky and the path to below 2% for the US is looking as difficult as it is below 4% for India.

Sridhar Sivaram: No, I think I was very happy with the Budget from an overall standpoint. One, the fiscal glide path—which is what I give more importance to, because that's what makes a difference to the macro numbers in the overall scheme of things—looks extremely good.

I know that even the next year, they're committed to, you know, 4.5 or below. And then I look at, you know, the capital expenditure number. It's a growth of about 16–17% from where they were last year and keep in mind that there's only that much you can do. You're just not distributing money. This is actually into hard assets and these take time.

So, I think, within the constraints that they have, this is a reasonably good number. At some point, the private sector has to take up the mantle of this whole capital expenditure bogey, which we haven't seen coming from the private sector. Hopefully it will start to come.

Sridhar Sivaram: I think, we are seeing early signs that it will. I mean in some cases, I know, that they were waiting for the new government to come. Now that has also happened.

In a lot of the cases, we are seeing capacity utilisation already reaching a stage where they will have to put private capex. I think, if you go back to the 2003–2007 period, or even the 2011–2014 period, I think the power sector took a large percentage of the private capex. I am seeing a revival of the power sector in different forms. It may not be in thermal, but you see it in all the renewables.

So India is adding significant amounts to power. We are also seeing capex because of increased demands from manufacturing which is because of exports. But these will take time. But I think it's happening.

Coming back to Budget, I think, if I look at capital expenditure, I do not have any issues. There has been some boost to consumption by giving more money in the hands of people by pushing people into the new tax regime.

And the stress on employment, we'll have to wait and see how it works. But at least there has been an attempt to incentivise employment. My view on employment has been slightly different. Actually the Centre cannot create employment. They don't set up factories. They don't set up call centres. It is a state, which has to do.

The Centre can only facilitate. Have they facilitated during the last five years? If you ask me, the question is yes. And there have been states, which have done very well in employment. Look at say Andhra, Telangana, Tamil Nadu and Karnataka to a large extent, till all this news that has come now. So it is the state that has to do and I think the Centre has done a reasonable job.

I really don't understand why the Centre is taking the responsibility for employment. You can't generate employment. You can only facilitate. Maybe they've done a good job of trying to facilitate with all the 3–4 schemes that they've announced.

So overall, I have no complaints. Within the constraints, I think this is a reasonable Budget. We expect too much out of a Budget. I mean, keep in mind that indirect taxes are totally out. So, what we are left with is only direct tax. Even in direct tax broadly everything is known. So, I think, there is only that much to expect from a Budget.

Sridhar Sivaram: So I'll tell you how I have rationalised this. Most participants in the market were expecting this for the last 18 months. That rationalisation of the definition of long term is going to happen. The previous finance secretary on his exit interview actually made it public that this is being discussed.

If you ask me I was expecting this in February. It has come possibly six months earlier. But we were also expecting that the definition of long term could move to 24 months and as a result, you know, what has come is slightly better than what most participants were expecting. Your equity long term stays at one year, you short term has gone up and your long term has also gone up by 2.5%, which may not have been expected.

In the overall scheme of things, I think, the certainty that broadly this stays for the next 4–5 years is also quite positive. That's how I would rationalise this. Higher taxes are never good. But having said that, when you look at the percentage of people who contribute to the tax, it is abysmally low. And I think the community which invests in the market, I think can pay a little more tax.

Sridhar Sivaram: So when I look at the markets as we speak today, it doesn't look as if the markets were very unhappy, even on the day of the Budget. So, we did make representations to the Finance Ministry that if you do anything like this, it will have a very drastic impact on the market and today we are looking very stupid. When we go there next time, they will say hey listen, you said this, and this is what is happening in the market. So you guys are clueless.

But having said that, I will still say that the number of people who file for returns and the number of people who make any substantial gains and there are some data floating around on this, is still very abysmally low. There are people who are making even, you know, five lakhs of profit out of stock markets. The reported ones are abysmally low.

So, I think, the evidence that almost 80% of the tax is paid by 0.3% of the filers is a drastic number. So the point I'm making is that, while the market is evolving and more participants are coming in, the taxation side hasn't still seen that.

Sridhar Sivaram: No, I don't think the portfolio strategy changes. The Budget was broadly an extension of where we were, barring a little bit of push to consumption. But I don't think that makes some massive difference to the listed consumption space. I think broadly, it remains the same.

I mean, incrementally the market is becoming more and more a bottom-up market than a top down because within each sector, some of the stocks are trading at fair value or above fair value. So it becomes difficult to take a really top-down macro call and buy anything. So, individually, you will find good stocks. Maybe one or two sectors here and there are looking good but even there, everything is expensive.

Sridhar Sivaram: As I said last time also, power sector is something which we're very bullish on, because we are seeing a push from the government to India's underinvested in power in the last few years. And incrementally, as I see newer industries emerging, be it data centres, be it EVs, you know all of this will require more and more power, plus the normal demand for power.

So we're going to see push to you know, wind, solar, all the renewable energy, plus in thermal also. So we would be adding 70-80 gigawatts of thermal power over the next 4–5 years. We will double solar in the next 3–4 years. And, double wind in 3–4 years.

So, obviously, there's a lot of activity happening in this segment. How we play this is, look at the equipment providers, because that's a far better way of playing. Utilities also will have their own role to play. So I think this whole gamut looks very exciting.

Having said that, a lot of the stocks have run up. We've been speaking about this for a while now, but earnings have been very good. Guidance for the future earnings also have been extremely positive. So if you take a two-year view, then possibly they look reasonable, but this is an exciting space.

Financials is another one which we like, but we've seen some headwinds from the Reserve Bank from time to time. We saw one on Thursday. A combination of PSUs and private both. I still like a few PSU banks where credit costs are not very low. So there's still some room for credit costs to fall. As a result, profits can continue to go up for the next few years.

Private sector hasn't done anything for a while. In my view, there's one more pain quarter—the next one. And then, things should normalise. So this is a good time to accumulate the private sectors. Financials, in general, specially the banks are my preference, not the NBFCs.

Sridhar Sivaram: I think, it'll be a combination of multiple factors. One, of course, is the base effect itself. Two, the fact that I would expect some moderation of the rate cycle, over say the next 9–12 months. And as that happens, even if the RBI doesn't cut the rate, just increases the liquidity, the deposit conditions that we are facing right now can improve a lot. So if that happens, the scramble for deposits that we're seeing right now can improve. That helps the margins.

Private capex, of course, because if you look at most of the private sector banks, they are almost now, retail banks. They are almost 60–70% into retail lending, from where they were in the past. So I think that factor also does play a role, plus the valuation itself.

The fact that you're not buying these banks at four and five times price-to-book, even at these earnings levels, the ROEs and ROAs are still very attractive. It's just that the earnings growth momentum has sort of taken a backseat. So from say, 18–20% they are now at say 10–11%. In some cases even lower. So that has been the challenge.

Sridhar Sivaram: I think that the RBI’s step is in the right direction—nudging banks to, you know, look for deposits rather than other ways of finding liabilities. So, I would support the RBI and whatever they have done till now.

The only thing I would look for is signals from RBI on liquidity, because that's something they can manage better if the government doesn't spend. Like this year, the government spending has got delayed because of elections. So, we've seen the liquidity conditions a bit more tighter than what you see normally. But they do manage these short-term liquidity much better.

But we are seeing a scramble for deposits. Most banks have increased their deposit rates. So which is sort of indicating that, you know, you need to fight for deposits.

Sridhar Sivaram: I would say, as an investor who looks for value, buy on dips. But if you take a 2–3 year view, there is a lot of value. They will show very strong earnings growth. I mean, you're talking about north of 30%.

So if you push it by two years, they look better. If you push it by three years, it is difficult to project. So I'm not, you know, getting into that territory. But every year, you get 2–3 days of buying opportunities. And you have to be ready to, you know, pounce on those days.

So you have to do your homework and be prepared. But the space is looking very exciting and there are newer opportunities coming every day.

Sridhar Sivaram: I think, this space is getting disrupted by EVs. So two-wheelers surely are getting disrupted. We will have an EV listed in the market very soon—Ola. So we'll start to get more numbers on a regular basis but this space is getting disrupted.

So I will be very cautious because the multiples that we are giving today for an industry, which is getting disrupted, is fairly high. I'm not saying that the traditional autos become zero. I mean, they will coexist, but just that the growth rate that we were getting already, if you take say last five-year growth rate or a 10-year growth rate, they're not in the high teens, they are in the single digits in most categories.

I'm not saying companies here. So if you take two-wheelers as a category, you take scooters as a category or take passenger vehicles as a category, the industry has grown at single digit. And within that, if EVs are taking a share, then the pressure on the others continues to increase. So I would be cautious.

I would prefer the auto ancillaries because that's where you have a bit more headroom for growth. Irrespective of what happens to the industry, you still need the ancillaries to provide because most of these companies are actually assemblers. They don't actually manufacture much. They just assemble everything.

Sridhar Sivaram: Actually, I don't get time to read books. I have so many other interests to pursue. Most of the time I'm reading balance sheets and research reports. So I prefer to, you know, watch videos and podcasts.

I like the Smita Prakash podcast—the ANI one, because she gets a very different variety of speakers and they're fairly detailed. So it had one on Bhavesh also very recently and I found that very interesting. You get to understand a person far more when you listen to a one-hour podcast. And you can watch it at your own pace. You can increase the speed.

So I prefer to listen than to read because I also travel a lot. I watch movies and I speak five languages. So I watch movies in five languages. So I really don't get time to read. That's an honest admission that I'm not in the book space.