Nirmal Jain & R Venkataraman leads IIFL India's leading financial supermarket

Market sentiment is fragile on concerns related to?developed market growth,?widening credit spread and muted domestic?corporate earnings, says Nirmal Jain, Chairman of IIFL.

Speaking to CNBC-TV18, he?says?investors should avoid pre-Budget buying as worsening?global conditions might continue to rub off on India and that could present better buying?opportunities once Budget is out of the way.?

Jain is bullish on India and believes?it will not only feature among?the top emerging markets but is also?better placed?to?recover faster amid continuing global crisis.

Sectorally, he believes fast moving consumer goods (FMCG), pharma, cement, information Technology (IT) and auto will provide growth opportunities in the long term.

He?is of the view that balance sheet cleansing of the public sector unit (PSU) banks will happen by FY17-end.

Below is the verbatim transcript of Nirmal Jain??? interview with Latha Venkatesh & Anuj Singhal on CNBC-TV18.

Anuj: It has not been a good last two years for our market. Do you think Budget can change things or is this just global in nature and that is why we are hostage to global cues?

A: It is too global in nature but Budget can certainly have impact. So, this time expectations from Budget are too many. People are looking at some significant changes in terms of the way the investment cycle is on the tech side. Also parliament session should probably make some progress on other bills. So, there are expectations from the Budget but you are right, there are overwhelming global factors and you cannot ignore them.

Latha: Just from a technical stand point is the market going into the Budget with such weak expectation that the market not India Inc, the rest of us, the market going a little weak in to the Budget that at least we will be spared some post Budget damage?

A: Yes and no, one is, market sentiment is very fragile. Two to three major problems as you know globally things are not stable. The developed market is there are serious concerns about growth sustaining and therefore the credits spread is widening. That is not good for emerging market equities so you have global backdrop which is not positive.

Back home corporate earnings have not taken off; they have been disappointing quarter after quarter. Still analysts aren??? certain when the recovery will happen this quarter, next quarter, still a few more quarter. So, in this kind of fragile environment if the long-term capital gain tax or anything happens which is market sensitive it may not have so much of impact on revenue. Then there can be a bit of a kneejerk reaction and in fact that may be a great opportunity to buy.

So, if the stocks really crash because of something the Budget is not viewed well by the market then medium-term India??? fundamentals story will play out. That may be great opportunity to buy, but at this point in time if I as an inventor I would rather wait for the Budget. I won??? rush into doing any pre-Budget buying thinking that there will be post-Budget rally. With the global back drop that we have I don??? think markets are going to run away.

Anuj: Since you talk to foreign institutional investor (FIIs) you also have retail clients and high net worth individual (HNI) clients what is the mood right now regarding this long-term capital gains tax? Is this just fear mongering right now because we are in a bit of a bear market or is this genuine risk?

A: Typically in all the Budgets government will do selective leak to the media so they can get public opinion on various provisions. So long-term capital gain (LTCG) tax for the unlisted shares they made it three years so there is a concern that they may make it from one year to three years to make it completely tax free. The key issue here which people are forgetting or they are really not understanding is when securities transaction tax (STT) was brought in that was brought in lieu of no capital gain tax after one year. So, if you continue to have STT and introduce this then obviously there is dual taxation and market will not take it gently.

So, there is a concern that if LTCG is increased from one year to three year in any case many people have kept loss at this point of time. So, it is not that is going to give so much of revenue to the government. STT in a way is giving much better revenue of Rs 12,000 crore. My guess is long-term capital gain tax won??? even give Rs 2,000 crore. So, may be status quo would be better way forward and if that happens market will heave a sigh of relief.

Latha: Suppose they took it away with an increase in STT?

A: Not a good idea again. To my mind STT as in there is generating lot of revenues than capital gain tax would have been. So, when the stocks markets sentiment is bearish or fragile you don??? want to do something which will hurt it.

Anuj: The big question then right now are we in a bear market globally and for India and can we seek much lower levels? Even if that means you get the best buying opportunities now but are we in a bit of a bear face?

A: Fundamentally India is much better placed; it is a shining star in the world because the growth here is fastest. India benefits from whatever is happening globally on the crude oil front or the commodity front. So, as the dust settles India will emerge as a preferred or a favoured destination for investment. With that perspective if you are little medium-term invested you would rather wait for the opportunity.

However, because there are too many events and too many moving parts you may get an opportunity where there is a kneejerk reaction so whenever global markets have a crash India can??? be spared. However, India will recover faster. So, I would say that wait for an opportunity. In a global environment like this you will get one or may be more.

Latha: When you spoke about the post Budget possible damage because of these one-offs you said that would be an opportunity to buy? Which are the sectors where you think capital will be preserved at the moment growth of capital is looking difficult?

A: Quite a few sectors, fast-moving consumer goods (FMCG) sector is one, pharmaceutical is another sector which we think is long-term good investment. Cement also because it will be thrust on housing and infra and cement companies should do well. IT is yet another sector where they will be some good investment opportunities and even auto for that matter you will have few good investment stocks there.

Anuj: The last 10 or15 days we have seen significant price damages in some of the erstwhile stronger stocks; HDFC, HDFC Bank, while ICICI and all had been in bear market but at least these stocks were holding out. Is this the capitulation phase where you are selling of stocks even where you were making money?

A: Some of the FIIs are facing redemptions either in the emerging market funds or whatever funds they invested in India. They are not able to sell other stocks and that is why ultimately they get into selling these stocks. So, the capitulation phase can happen if the Budget is viewed negatively by the market at this point in time because other than that more or less all factors are known or they have been taken by the market.

So, if something happens there then that can be one trigger. However, other than that I don??? see, market may keep sliding little bit down if the global mood is bearish but I don??? see any reason for panic at this point in time.

Latha: The performance of the financial sector in general, private sector banks and public sector banks just about everyone knew that they were evergreening non-performing loans (NPLs) and that was not the real number that 4 or 5 percent that was being shown in the profit and loss (P&L). However, when it was exposed the markets have clearly taken it badly. Even coincided with the global financial stocks taking a knock is all that poison out or is it casting fresh damage on the real economy?

A: That poison is not out completely.

Latha: As far as the markets discounting?

A: So, market really don??? know. The problem here is that there will be one set of people who will think that a significant part of poison is out may be 80 percent other will feel that no, it just tip of that ice berg. I think the entire cleansing process will go on till FY17 end.

In PSU banks, one estimate is that they need about Rs 3 lakh crore of capital infusion just to be at the current state of where they are. Budget at best we can expect about Rs 1 lakh crore. This is a problem which needs permanent solution because every year or every couple of year you can??? keep recapitalising and again capital keeps getting eroded. So, while should government be in a business of banking with so many banks. They can keep State Bank of India (SBI) and try and privatise other or try and sell-off. So, some such out of box courageous decision is required.

At this point in time market also goes by the numbers that are declared and if I really don??? know that how much of loss PSU banks have how will I buy. So, whatever net worth, whatever book multiple you see can change.

Source: moneycontrol.com