Sunil Subramaniam, MD & CEO, Sundaram Mutual Fund, says while he does not expect any direct tax cut, the government may tweak LTCG in the Union Budget and the domestic stock market will scale new lifetime highs post that event. Excerpts from an interview with ETNOW.
ET Now: A lot is riding on the Budget because as of now it is no ordinary macroeconomic backdrop that we are seeing. GDP growth is low, fiscally there is little elbow room, tax collection has been fairly modest. What are you going with in terms of your wish list or your expectation?
Sunil Subramaniam: First of all, the fiscal being stretched is this year’s phenomenon. The Budget is going to talk about next year’s fiscal and spending from that and I do not think it is going to be an issue.
In the new year, the government will naturally project much higher GST collections, and again a very ambitious disinvestment target because this year is gone and done and dusted. There will be a report card for this year, which may not present a very happy story. But you will see the government laying out the expenditure plan for next year which will depend on the tax collections. But today, we are going to trade on the promise that that is going to happen.
And given the liquidity surplus that is there, the market is going to bet on that promise. I expect the market to touch new life-time highs post the Budget. One thing about this government is that they do not wait for the Budget to make their major announcements. They have done a lot like a corporate tax cut, infra push all in the run up to the Budget. The Budget will be more about the NBFC and banking reform. It will be more about employment generation and the land reform situation.
On the direct taxes piece, rather than do a direct income tax cut, the government might tinker with LTCG because disinvestment is high on their agenda and the fact that LTCG has not proved to be the windfall in terms of inflows. One thing about this government is that they are generally late in reacting but when they react, they react strongly. More importantly, they are not hesitant to reverse popular decisions. They have finally come to terms with the reality of the fact that Mr Modi talked about how he wants to encourage and support wealth creators, but LTCG is actually anti of that. So I am hopeful they will do something on the LTCG and push it to three or five years.
ET Now: With the latest inflation figures coming out as well, for the govt to push on the fiscal front is going to be incredibly challenging. Is that what the market will also watch out for?
Sunil Subramaniam: No I do not agree with that because if you look at two things – from a rating perspective we are at the borderline of investment grade. One of the reasons we cannot afford to spend too much is the worry with the rating agencies. But at the same time if you look at the quality of expenditure of the government, it is pretty healthy. The quality of the expenditure is good and the rating agency will be far more tolerant of what you are spending for because the rating is ultimately dependent on growth and that scenario.
I am not very sure what you are talking about the fisc stretch, but the market is already looking beyond that. This year is done and dusted. Everyone knows what has happened this year. Tax collections have not happened; the government has given away one and a half lakh crores of tax. That is fine but you have the next year and the new budget and even if you project a 15% growth in tax revenues you are going to have an enormous room to spend.
The Budget is one of hope and optimism and what the market is also looking for. Everyone knows the bad news. All they want from the finance minister is to say this is the roadmap ahead. These are the steps we are taking and they do not mind if they are little rich on the inflow part in order to fit in the mega plan on the expenditure part. The market is ready to cut that slack to the government today.
ET Now: If govt doesn’t do things which markets expect them to do this Budget, can things really turn ugly in the short term?
Sunil Subramaniam: The market is flushed with liquidity and there is no room for negativity when you have money in your hands.
ET Now: No room for negativity... which means if bad news comes out it will be discounted?
Sunil Subramaniam: It will be treated as saying that the news is out in the domain, the future is going to look good and the market has been doing that. In fact over the last three, six months what is happening is that we are actually seeing the small caps and the midcaps rally with an economic slowdown. Why? Because the market firmly believes that once you know something is out in the public domain it is history; it is like the autopsy of a body; what you are looking for is this future. I do not think there is any surprise in bad news and one of the key things which I do expect to happen is the NBFC reform.
The government could announce some very strong steps in terms of giving the quasi bank status to some of the larger good quality NBFCs so that their cost of funding gets encouraged because the PSU banks will take a bit of time to rebound and the mergers that have been announced will likely take the whole of 2020. NBFC is one reform which they have yet to really tackle. Post the IL&FS crisis, they have not tackled the NBFC crisis at all.
ET Now: Again looking at historical data, gold and nifty have given the same returns in last decade
Sunil Subramaniam: Correct.
ET Now: Midcap index and the Nifty have given the same return. Now, question is if somebody is buying gold you would say I do not have to bother about the headlines, I do not have to look at the ticker every day, I do not have to make a view on what is going to happen in the world. I simply buy the gold and I am making a good return which is risk-free return. If I am buying mid and small cap stocks I have the feeling, this will go right, that will go right. So, the lower you have gone in terms of risk the better the returns have been, how ironical is that?
Sunil Subramaniam: The reason because you are looking at a point in time when risk has been punished. Whenever you look at it in a cycle and the risk has been punished, you will always find that safety has delivered better returns than risk. It entirely depends upon which lenses you are viewing the market. At this point when risk is being punished, everything will look bad. And when there is liquidity combined with risk being punished, naturally safety will get preference. But going forward, if you believe that growth is going to come back automatically, I guarantee three years from now, you will say why did I bother to put money in gold. This is because gold as a safety hedge actually delivers the returns best when the whole industry and the market and the inflation and everything is uncertain. It is a safety hedge and unfortunately the way liquidity works is that in a time of high riskiness, safety actually gets a lot of money because lots of behavioural thing says let me not take a risk.
ET Now: Equities will always give you superior returns, but it is important to identify the high growth businesses. For the next three to five years which could be the outsize gainer in the equity market and what would be the high growth sector, company or clan?
Sunil Subramaniam: The next three to five year will see a huge shift of manufacturing from China to India. And I will just give you some sense of the numbers. Some $540 billion is America imports from China, $54 billion is India’s imports from China. China is losing 21 million people from its workforce in the next decade while India is adding 117 million people to its workforce. China has a per capita income of $10,000 which is per capita wages equivalent. India is at $2000. In the last three years, Chinese companies have invested $25 billion FDI in India and this number is expected to double over the next. So, even Chinese companies themselves are looking to shift their manufacturing and are taking advantage of Indian reform. Over the next three to five years, what is going to happen when they come in? They need to set up factories, set up plants and machinery. This will lead to more demand for cement, steel, capital goods suppliers. Over the last three years they have been punished. Today you are in a sweet spot, since their valuations are reasonable and the future growth prospects are high. So, in infra related funds and smallcap-related funds, because small cap index has about 40% into infra and capital goods stocks, you will see quadruple rise. Your Rs 10 NAV will become Rs 40 in my guess in five years time. So that is going to be the next big multibagger.
ET Now: I saw an article a couple of days ago that somebody has made a building by 3D printing. If the way manufacturing has been done in the past changes, are we going to see a big change in technology adoption, cement consumption, steel usage?
Sunil Subramaniam: My question here is that even if you do a 3D printing you still need cement and concrete to build that building. It is only the imaging and the execution that is happening. You still need basic building blocks, you are not going to build a building in plastic. Two, in the technology versus people debate for India which has such a sheer supply of labour, it will be much cheaper to use labour that technology. So we are going to delay that process. It is an inevitable process but India is going to be that country which is going to hold back this world’s advance because we are going to have high skilled English speaking labour available at very reasonable rates. At the end of the day, cost drives world economics and it is always about producing where it is cheapest, selling where it is most expensive.
I am still not talking about India becoming a manufacturing capital. I am talking about the whole building up for the capacity, not from an Indian demand perspective but to satisfy, to substitute what China is already doing in the world. And if there is any news of the world recovery coming faster that is going to give this a further upshot. Today just the substitution effect is going to drive the businesses here. So your smallcap and your infra related funds are the next multibagger segments.
ET Now: A lot is riding on the Budget because as of now it is no ordinary macroeconomic backdrop that we are seeing. GDP growth is low, fiscally there is little elbow room, tax collection has been fairly modest. What are you going with in terms of your wish list or your expectation?
Sunil Subramaniam: First of all, the fiscal being stretched is this year’s phenomenon. The Budget is going to talk about next year’s fiscal and spending from that and I do not think it is going to be an issue.
In the new year, the government will naturally project much higher GST collections, and again a very ambitious disinvestment target because this year is gone and done and dusted. There will be a report card for this year, which may not present a very happy story. But you will see the government laying out the expenditure plan for next year which will depend on the tax collections. But today, we are going to trade on the promise that that is going to happen.
And given the liquidity surplus that is there, the market is going to bet on that promise. I expect the market to touch new life-time highs post the Budget. One thing about this government is that they do not wait for the Budget to make their major announcements. They have done a lot like a corporate tax cut, infra push all in the run up to the Budget. The Budget will be more about the NBFC and banking reform. It will be more about employment generation and the land reform situation.
On the direct taxes piece, rather than do a direct income tax cut, the government might tinker with LTCG because disinvestment is high on their agenda and the fact that LTCG has not proved to be the windfall in terms of inflows. One thing about this government is that they are generally late in reacting but when they react, they react strongly. More importantly, they are not hesitant to reverse popular decisions. They have finally come to terms with the reality of the fact that Mr Modi talked about how he wants to encourage and support wealth creators, but LTCG is actually anti of that. So I am hopeful they will do something on the LTCG and push it to three or five years.
ET Now: With the latest inflation figures coming out as well, for the govt to push on the fiscal front is going to be incredibly challenging. Is that what the market will also watch out for?
Sunil Subramaniam: No I do not agree with that because if you look at two things – from a rating perspective we are at the borderline of investment grade. One of the reasons we cannot afford to spend too much is the worry with the rating agencies. But at the same time if you look at the quality of expenditure of the government, it is pretty healthy. The quality of the expenditure is good and the rating agency will be far more tolerant of what you are spending for because the rating is ultimately dependent on growth and that scenario.
I am not very sure what you are talking about the fisc stretch, but the market is already looking beyond that. This year is done and dusted. Everyone knows what has happened this year. Tax collections have not happened; the government has given away one and a half lakh crores of tax. That is fine but you have the next year and the new budget and even if you project a 15% growth in tax revenues you are going to have an enormous room to spend.
The Budget is one of hope and optimism and what the market is also looking for. Everyone knows the bad news. All they want from the finance minister is to say this is the roadmap ahead. These are the steps we are taking and they do not mind if they are little rich on the inflow part in order to fit in the mega plan on the expenditure part. The market is ready to cut that slack to the government today.
ET Now: If govt doesn’t do things which markets expect them to do this Budget, can things really turn ugly in the short term?
Sunil Subramaniam: The market is flushed with liquidity and there is no room for negativity when you have money in your hands.
ET Now: No room for negativity... which means if bad news comes out it will be discounted?
Sunil Subramaniam: It will be treated as saying that the news is out in the domain, the future is going to look good and the market has been doing that. In fact over the last three, six months what is happening is that we are actually seeing the small caps and the midcaps rally with an economic slowdown. Why? Because the market firmly believes that once you know something is out in the public domain it is history; it is like the autopsy of a body; what you are looking for is this future. I do not think there is any surprise in bad news and one of the key things which I do expect to happen is the NBFC reform.
The government could announce some very strong steps in terms of giving the quasi bank status to some of the larger good quality NBFCs so that their cost of funding gets encouraged because the PSU banks will take a bit of time to rebound and the mergers that have been announced will likely take the whole of 2020. NBFC is one reform which they have yet to really tackle. Post the IL&FS crisis, they have not tackled the NBFC crisis at all.
ET Now: Again looking at historical data, gold and nifty have given the same returns in last decade
Sunil Subramaniam: Correct.
ET Now: Midcap index and the Nifty have given the same return. Now, question is if somebody is buying gold you would say I do not have to bother about the headlines, I do not have to look at the ticker every day, I do not have to make a view on what is going to happen in the world. I simply buy the gold and I am making a good return which is risk-free return. If I am buying mid and small cap stocks I have the feeling, this will go right, that will go right. So, the lower you have gone in terms of risk the better the returns have been, how ironical is that?
Sunil Subramaniam: The reason because you are looking at a point in time when risk has been punished. Whenever you look at it in a cycle and the risk has been punished, you will always find that safety has delivered better returns than risk. It entirely depends upon which lenses you are viewing the market. At this point when risk is being punished, everything will look bad. And when there is liquidity combined with risk being punished, naturally safety will get preference. But going forward, if you believe that growth is going to come back automatically, I guarantee three years from now, you will say why did I bother to put money in gold. This is because gold as a safety hedge actually delivers the returns best when the whole industry and the market and the inflation and everything is uncertain. It is a safety hedge and unfortunately the way liquidity works is that in a time of high riskiness, safety actually gets a lot of money because lots of behavioural thing says let me not take a risk.
ET Now: Equities will always give you superior returns, but it is important to identify the high growth businesses. For the next three to five years which could be the outsize gainer in the equity market and what would be the high growth sector, company or clan?
Sunil Subramaniam: The next three to five year will see a huge shift of manufacturing from China to India. And I will just give you some sense of the numbers. Some $540 billion is America imports from China, $54 billion is India’s imports from China. China is losing 21 million people from its workforce in the next decade while India is adding 117 million people to its workforce. China has a per capita income of $10,000 which is per capita wages equivalent. India is at $2000. In the last three years, Chinese companies have invested $25 billion FDI in India and this number is expected to double over the next. So, even Chinese companies themselves are looking to shift their manufacturing and are taking advantage of Indian reform. Over the next three to five years, what is going to happen when they come in? They need to set up factories, set up plants and machinery. This will lead to more demand for cement, steel, capital goods suppliers. Over the last three years they have been punished. Today you are in a sweet spot, since their valuations are reasonable and the future growth prospects are high. So, in infra related funds and smallcap-related funds, because small cap index has about 40% into infra and capital goods stocks, you will see quadruple rise. Your Rs 10 NAV will become Rs 40 in my guess in five years time. So that is going to be the next big multibagger.
ET Now: I saw an article a couple of days ago that somebody has made a building by 3D printing. If the way manufacturing has been done in the past changes, are we going to see a big change in technology adoption, cement consumption, steel usage?
Sunil Subramaniam: My question here is that even if you do a 3D printing you still need cement and concrete to build that building. It is only the imaging and the execution that is happening. You still need basic building blocks, you are not going to build a building in plastic. Two, in the technology versus people debate for India which has such a sheer supply of labour, it will be much cheaper to use labour that technology. So we are going to delay that process. It is an inevitable process but India is going to be that country which is going to hold back this world’s advance because we are going to have high skilled English speaking labour available at very reasonable rates. At the end of the day, cost drives world economics and it is always about producing where it is cheapest, selling where it is most expensive.
I am still not talking about India becoming a manufacturing capital. I am talking about the whole building up for the capacity, not from an Indian demand perspective but to satisfy, to substitute what China is already doing in the world. And if there is any news of the world recovery coming faster that is going to give this a further upshot. Today just the substitution effect is going to drive the businesses here. So your smallcap and your infra related funds are the next multibagger segments.
( Originally published on Jan 14, 2020 )
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