Market reaction to budget is perplexing, says Huzaifa Husain,

While the budget seemed to have cheered up the markets, the reaction seems to have ignored the increase in taxation, feels Huzaifa Husain, head—equities, AIG Investments. He said that the measures for reducing deficit are welcome but the implementation of the roadmap for fiscal consolidation would be closely watched by the market. Meanwhile, consumption still remains a strong investment bet along with infrastructure, he said in an interview with DNA. Excerpts:

With the Sensex going up nearly 800 points, what has the budget changed for the markets?
It is a bit perplexing to see the markets reacting so positively to the budget. The positives definitely were the reduction in fiscal deficit as well as the increasing of income-tax slabs for individuals. But on the other hand, the reduction in fiscal deficit has been brought about by partial rollback of taxes as well as imposition of service taxes on new areas. Service tax, especially on rentals, construction, rail freight etc, is not positive for the corporate sector, neither is the increase in the minimum alternate tax (MAT). We think that the markets may have reacted more to global news flows rather than to the budget. We would like to wait and watch how these tax increases impact margins of companies.

How will the divestment target of Rs 40,000 crore affect the availability of liquidity for the secondary market?
As long as the valuations are reasonable, the market can easily provide the funds for the disinvestment target to be met.

Does the fiscal consolidation roadmap, as spoken in the budget, meet expectations?
If achieved, it does meet expectations. The most important aspect of the budget would be to keep a check on public debt and reduce it. This huge debt takes away precious resources in the form of interest payments. So, as long as the fiscal deficit grows slower than the GDP, overall debt will start coming down releasing funds for development.

How major an impact could consumption-oriented sectors see due to the budget measures?
Consumption sectors have got a lot of tailwind. First, there should be an increase in disposable income because of the budgetary proposals for individual taxation. Secondly, urban consumption post last year’s lull should rebound as layoffs have reduced and hiring has increased apart from salary hikes. Thirdly, rural consumption should be strong, based on the stimulus measures being continued as well as rise in farmer incomes due to high foodgrain prices. So, apart from the budget, there are other positive forces impacting consumption. The only risk is that increased inflation will eat into the disposable incomes of the poor.

Which sectors are you bullish on?
Other than consumption, we are also positive on the infrastructure sector, especially companies which own infrastructure facilities and are enjoying pricing power because of delayed fresh projects. As fresh projects get delayed, the existing providers of the infrastructure services can price their service better like in the case of merchant power tariffs. We also like companies that have a strong competitive position in the market and hence could pass on the inflationary impact on their cost of production to customers and not take an impact on the margins.

What are your expectations from the last quarter results?
I would like to see more sales growth to get confident on the sustainability of recovery. Sectorally, one would want NPA accretion of banks to slow down or fall, infrastructure delays to reduce, high volume growth to sustain in consumer-related sectors and finally export sectors to start showing good growth as they faced the brunt of slowdown last year.

Is there scope for an earnings upgrade to positively impact the valuations of the market?
Yes, if the global recovery — which is still not broad based — becomes more sustained, and locally if private consumption and investment picks up substantially then one could see an upgrade in earnings.

How would you define your investment style? How much are you influenced by technical analysis and how much do you rely on fundamental analysis?
Our investment style is purely ‘bottom up’, which means that we study a company’s business prospects, evaluate its management and determine a fair valuation before buying a stock. We are
fundamentals-driven in our approach. We minimise risk by doing an in-depth analysis and running a more focused portfolio (of 25-30 stocks) so that we can track our companies better.
What are the prime cues for the market over the medium term?

For India to sustain a good GDP growth and hence good market returns, infrastructure investments need to be enhanced significantly. Infrastructure is like the arteries and muscles, which keep the organs functioning. Without more roads, car population cannot increase; without more power, industrial production cannot increase; without more ports, trade will not increase. Hence, it is imperative for this sector to keep growing at above-GDP growth rates. Infrastructure, by nature, pertains to very large projects and requires multiple clearances and also has an impact on the environment. Hence, one needs to keep a close eye on this sector, which, in turn, will drive the economy, the earnings and finally the market.