Mkt will take 5.5% fiscal deficit no positively: Madhu Kela

Madhu Kela, Head Equity Investments, Reliance Mutual Fund says Budget may surprise positively. “Market will take 5.5% fiscal deficit number positively.”

Kela feels excise duty hike will not significantly impact the auto industry. ”Will look for higher disinvestment number from government.”

Here is a verbatim transcript of an exclusive interview with Madhu Kela on CNBC-TV18.

Q: Most of the times we dont see a post-Budget sell-off, do you think it is likely this time around?
A: I am happy we are seeing some pre-Budget sell-off this time. The market undertone is like what it is today. Then there are chances that post-Budget market will look up rather than selling off.

Q: Do you think that the market has already priced in or is going in with very low expectations therefore the chances of a relief rally are higher going forward?
A: Budget proves to be a non-event in a matter of three-five days. Market at a point was overvalued. It needed some chance to correction. If the market corrects 15-20% from the peak and if we go into the Budget after that, Budget may positively surprise people this time.

Q: For this Budget how central is this fiscal deficit issue? What would the market ideally like to hear on the fiscal deficit front?
A: The market would focus on the absolute number which the government will come up with. The market will focus on the roadmap and the body language of the FM as to how to fiscal deficit will get controlled over the next 12-24 months. For a macro-institutional, this is a very big thing. They will continue to watch.

Q: What is the number that the market would be happy with?
A: If the number is 5.5% or so, the market will take it positively.

Q: Would it want to see a concrete roadmap on how this is to be achieved instead of just a promise?
A: Yes, the market would like to see a concrete roadmap. Based on the roadmap that is proposed, the analysis will be done on whether it is achievable or not and people would like to take a view post that.

Q: Do you have a number in mind and would the market like to hear specific names of large companies?
A: I think that has already come. In the last 10-15 days, government has been very proactive. They have already given lists of companies that they would like to disinvest. It is not very difficult to estimate a number. I would not like to hazard a guess. However, I would like to see a much higher number. Given their own plan, what they have spoken in the last two months, these are the companies that will disinvest. I think it is a significantly large number.

Q: From an earnings perspective, the assumptions are that through FY11 the earnings will grow at a robust pace. The risk to that is withdrawal of stimulus and how it would affect some of the companies that have benefited from it. In the Budget, are those company earnings at risk at all?
A: Maybe marginally at risk. If you look at auto sector, the EBITDA margins have expanded from 12% to 20%. If the stimulus is withdrawn and if there is a compromise of 1-2% on EBITDA margins, then I don’t think it significantly changes the course of earnings for these companies. Markets have been anticipating this. These stocks have been underperformers for the last three-four months.

Q: Hero Honda management said that the growth would go to single digits if this stimulus is withdrawn, would you go with that argument for a sector like autos?
A: My hunch is that it is not linked to 1-2% price increase or decrease. The volume growth is linked to the overall feel good factor. The government will be sensible enough because they know that this recovery has happened. I do not expect them to go that far so that the fundamental recovery will be at risk.

Q: Do you see any major direct tax changes? In the US budget we have seen things like capital gains tax go up because of fiscal deficit pressures. Do you see the government doing anything around direct tax changes?
A: That will be a very worrisome factor. The introduction of long term capital gains may not be fundamentally a big thing. However, sentiment wise, it will dampen sentiment significantly.

Source: http://www.moneycontrol.com/news/mf-interview/mkt-will-take-55-fiscal-deficit-no-positively-madhu-kela_443888.html