Status quo on capital gains tax will boost investor confidence

The Budget session is underway. Do you expect it to be smooth in terms of passing bills crucial to economic continuity?

Given that the government holds a majority, I anticipate that the Budget session will proceed smoothly in terms of passing crucial bills. Over the next six months, at least, it seems likely that most bills will be passed without significant issues. The Finance Bill, in particular, is essential, and I expect it to pass without major obstacles. While there may be debates and discussions in Parliament, I don't foresee any significant political logjam that would hinder the legislative process.

Growth (GDP) has been robust and has been upgraded by multiple agencies (for FY25). With inflation at around 5%, nominal growth will be around 12%. How do you view this from an earnings perspective for large, mids, and smalls? What's your projection?

Broadly speaking, I project that the Nifty 50 should see around 15% earnings growth for fiscal 2025. Key sectors leading this growth will likely include banks, IT, oil and gas, and metals. These sectors are expected to drive significant earnings. While mid- and small-cap companies are more diversified, with some experiencing losses and others performing well, I anticipate that the overall earnings growth in these segments will be faster due to controlled inflation and robust economic conditions. However, the growth will not be uniform across all companies.

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What sectors are you most bullish on and which would you avoid? Why?

I am particularly bullish on sectors with strong earnings growth potential. PSUs are attractively valued relative to their growth prospects, especially those with monopolistic characteristics. The banking sector, including BFSI, particularly the insurance sector, is another area with promising earnings growth. IT is expected to make a comeback in the second half of the fiscal year, looking strong going into 2026. Oil and gas, along with metals, also appear to be in a good position. On the other hand, I would avoid sectors where valuations are very high despite expected earnings growth. Capital goods and defence companies fall into this category, as their valuations are not favourable. Additionally, the power sector, despite its growth potential, has stocks that are often priced to perfection, making them less attractive from an investment perspective.

How do you feel about new-age sectors like semiconductors, renewable energy, etc.?

New-age sectors like semiconductors have great potential but are still in the early stages of development. India needs significant investment to build a robust semiconductor ecosystem that can reduce reliance on imports from countries like Taiwan and China. The focus is on creating value domestically rather than just importing and assembling. Traditional valuation methods may not be suitable for these sectors due to their high capital expenditure, modest initial revenues, and potential losses. The success in these sectors will depend upon sustained investment and effective execution. Renewables are not particularly new age. The government has kept stiff targets to meet till 2030, 2050 and 2070 when we go carbon zero. Renewable, particularly, wind and solar look very bullish.

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There are increasingly worrying incidents of suspected front-running by certain funds, excesses by some shadow banks, etc. Are these isolated, or do they point to a need for greater regulatory intervention?

I believe these are isolated incidents and do not necessarily indicate a broader issue concerning capital markets. Regulatory oversight is required and welcome at all times. India's corporate governance in the money management sector is progressing towards the standards seen in developed markets, benefiting investors immensely. Regulatory actions currently being taken are appropriate and part of the natural evolution towards better governance. Specific incidents of excesses by shadow banks should be seen as exceptions rather than the norm.

Does the growing retail participation in F&O worry you? 

Yes, the growing retail participation in Futures and Options (F&O) is a concern. Many retail investors view it as a quick way to get rich, often underestimating the risks involved. The reality is that making money in F&O is extremely challenging, especially against sophisticated institutional investors and algorithmic traders. Retail investors are often better off adopting a disciplined and patient approach to investing rather than seeking quick profits through high-risk avenues. Regulatory measures to protect retail investors' capital would be beneficial for the overall market health.

Do you think regulatory intervention—such as the call auction for holdcos—could sometimes impinge on market forces? 

Theoretically, regulatory interventions like the call auction for holding companies may seem beneficial, but their practical effectiveness remains to be seen when it actually takes place in the market place. It's essential to monitor how these interventions play out in the market. While the intentions behind such regulations are generally good, their real-world impact needs careful evaluation to ensure they do not disrupt market dynamics adversely.

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To your mind, is private capex picking up? 

Yes, private capital expenditure (capex) is picking up, particularly in sectors like steel ,telecom, and cement which have significant capex plans. Overall manufacturing capacity utilization is around 70%, which is the threshold level where private capex typically starts to increase. While large capex by frontline companies has begun, the real trigger for a broader capex cycle will be the good availability of capital for SMEs across India. The capex cycle's full momentum will be realized when SME-level investments start flowing in more broadly.

What's your view on debt in the light of the inclusion on the JP Morgan Bond Index? 

The inclusion of Indian government debt in JP Morgan's indices likely opens the floodgates for foreign investment in Indian debt markets. This is positive for the rupee and could lead to lower yields due to increased demand. While it's essential to monitor inflation closely, this inclusion generally bodes well for India's financial stability and attractiveness to global investors.

Any expectations from the Budget for capital markets? Please elaborate. 

My primary expectation from the Budget is that there should be no increase in capital gains tax rates, as stability in this area is crucial for investor confidence. Sticking to the FRBM (Fiscal Responsibility and Budget Management Act) targets, particularly maintaining a fiscal deficit around 5.8%,for FY25 is vital. Adequate spending on health and education will help create jobs and support growth. Additionally, addressing the middle and lower-middle-class concerns about impact of high taxation and inflation will instill confidence in investors. Affordable housing schemes and policies through various incentives could help boost sentiment and create a feel-good factor. The government has done a good bit as far as food subsidy is concerned. Now it's apt they focus on affordable housing. Additionally, the government should focus on balancing capital expenditure to foster long-term growth with necessary revenue expenditure to support immediate needs.