When Narendra Modi-led government came to power in May 2014, the stock markets witnessed a sharp rally in anticipation of reform initiatives, rise in private investment, growth in earnings and GDP growth. However, as it completes a year, Nilesh Shah, CEO, Kotak Mahindra Mutual Fund, told Sandeep Singh that while the government has taken several steps, there is still work to be done on ‘ease of doing business’ for domestic players to invest. He said that while earnings will take off in FY17, private sector investment is still 4-6 quarters away. Excerpts:
Do you see things moving or has the government been just lucky?
There is not one economic parameter where the government has faltered. While oil prices have helped, not everything can be attributed to it. The government has also done things that have been recognised by the markets and are getting reflected. Going forward GST as well as land acquisition will be critical. With both land and GST Bills being sent to parliamentary panels, I think there will be a consensus on what is the minimum doable and we can move ahead on them.
Which ministries do you think have done better than others and are being appreciated by businesses operating within?
Companies operating in road, railways and mining are happy with their ministries as a lot of work has happened and they say that the ministers are responsive. Private sector investment which, otherwise looks a few quarters away, is looking to take-off in these sectors. I feel that road connectivity is an excellent way of spreading growth and that is the formula they are looking to follow.
What is one thing that corporates are still not happy with?
While the top level corruption has come down significantly, there is a feeling that the government has not done enough on ease of doing business. Even today, on the ground there is multiplicity of law, regulations and the ground-level situation is yet to change.
You said that private investment is still some time away, how far is it?
Capacity utilisation is so low that no new capacity will come till we start utilising existing ones. Even debt to equity ratio of many infrastructure companies is very high. My guess is that the government will kick-start investment (in railways, road, power and mining) first and then things will build on it. We are probably 4-6 quarters away from big ticket private investment. The earnings cycle will follow it and FY17 may be a bumper year in that sense.
So should equity investors invest for 2017?
Yes, 2017 is year to look forward to. There may be volatility in near term but 2017 will be the year when — government spending would kick-start private investment and support economic growth, would have improved capacity utilisation, lowered working capital cost and dropped inventory write-off. All these would result into big profit growth.
How important will rate cuts be?
Inflation has cooled off and growth rates have taken a hit so from economic point it makes sense to cut rates. While one per cent rate cut translates into about 7 per cent growth in profits, a 5 per cent increase in capacity utilisation translates into 10-15 per cent profit growth and these two financial and operating leverages can kick-in a turnaround in the economy.
What is your view on the MAT issue?
I think the MAT is something that was avoidable. In the past whenever our tax authorities or finance minister have talked about Mauritius tax treaty, our markets have corrected. And when that happened we went back and reassured them and the same has happened again. We have to respect investors or capital—local or foreign and assure that tax will not be retrospective and be prospective.