Govt will improve on fiscal numbers, economic activities will further gain momentum: MD & CEO, Aditya Birla Sun Life AMC

The pre-election growth which we witnessed in terms of GDP growth near 7.5 to 8 per cent and pick up in the key macro indicators such as automobile sales, engineering and manufacturing activities, imports and exports, will continue. Post the elections, the economic activities will further gain momentum. We see Centre and state governments continuing to invest in the country’s infrastructure, covering roads, railways, power sector, rural infrastructure building and manufacturing…it will probably gain more strength. The other area where we have seen improvement is in the tax collections on account of month-on-month rise in goods and services tax (GST), higher indirect taxes and also due to an improvement in corporate profitability. Improved tax collection gives the government more strength to manage finances. If there is a cut (in the interest rate) in the US at the end of the year, there is a high probability India may also consider a cut in the early part of the next year. The cost of capital will continue to be lower for more companies to pursue investment opportunities. Therefore, I see private capex also to pick up.

Given the coalition dynamics, how do you see fiscal consolidation?

The government’s focus is on both investment expenditure and tax collections. They are trying to improve tax compliance every month. As more people become tax compliant, it improves the overall tax collection. I believe the GST collection will cross Rs 2.5 lakh crore in the next few years, considering an improvement in collection efficiency of 8-10 per cent on a month-on-month basis. Secondly, most of the public sector enterprises (PSEs), that were under losses a few years back, have today not only become cash rich but have become an important component of the Indian ecosystem. As PSEs make more profit, they will also give more dividends to the government. Therefore, you will not find any impact on the fiscal situation under the present coalition government. On the contrary, they will improve on the fiscal numbers as they have enough room and means of spending money without impacting the fiscal. Lastly, the government’s ability to do asset monetisation. They have built huge infrastructure assets such as railway assets, which can be privatised. There are enough ways to raise resources and therefore the government may not take the path of non-fiscal prudence while driving economic growth.

Do you expect any major reforms to be announced in the upcoming Budget?

I think the continuity factor will remain in the Budget. I don’t see any new announcements but we will probably see a simpler Budget, in terms of tax applicability on different types of investments in the country and uniform tax structures, which are easier to understand. The finance minister has been often saying that we need to have simplified (tax) structures, and so that could come.

You will find more allocation towards the rural sector. If India has to progress, we need to have an equal focus on infrastructure building on one side and a push for consumption to pick up on the other side. We are already seeing consumption picking up across the country. The government has implemented a single tax structure for corporates. Though a similar thing cannot be implemented for individuals, there is a high probability that some kind of tax concessions to individuals can be considered. This will ensure more money in the hands of people for buying which in turn will have a positive impact on the next round of growth in the economy.

The market has been hitting new peaks every week. What is your outlook on markets in 2024?

We should not look only at 2024 but at the next five years. For the next five years, I think buoyancy will continue in the Indian equity markets. Corporate earnings for Indian companies will continue to be the driver. If our economy grows about 7.5 to 8 per cent, I think companies should grow about two-and-a-half times of that. If you take nominal GDP at 12 per cent then corporate earnings should be around 15 to 16 per cent on an average. If you apply the multiples of that to the market, I think multiple should also continue to remain stable and expand. We are a fast-growing economy in the world, so multiples will always remain somewhat at elevated levels.

I also see a significant pick-up in the global market for India-dedicated funds. So far, money has been going to global funds. In the next five years, you will find more money coming into India-dedicated funds from foreign institutional investors (FIIs), which was not the case earlier. The money flow will also be good for the country. Overall, buoyancy will continue.

From the investors’ point of view, we have seen the best period in the last five years from the point of view of returns. Mutual fund investors have made good money by investing in mutual funds and equity. It (the market) may go through a consolidation period but which year consolidation will happen we don’t know. The market has to go through a one-year consolidation period which will be more for settling down the euphoria.

Do fundamentals justify market buoyancy? Due to good returns in the last one year, mutual funds are getting good inflows which are being deployed in the market. Is it also adding to the buoyancy in the market?

This is a worldwide phenomenon. One of the biggest reasons for the US market to continue to do well is that a large number of investors have been coming into the equity market.

If you are looking at investing for the long-term then mutual fund equity investments have to be part of your portfolio. As mutual fund equity investments become part of one’s portfolio, we will see an increase in flows into the market. Given the fact that still not many investors have come under mutual funds, we still have a long way to go. So, domestic flow-led buoyancy in the market will remain and therefore volatility will also be less.

From an economic point of view, there is no discomfort. We are a growing economy. We will be in a stable position and better than the last few years of growth rate. As long as economic parameters including fiscal position and interest rates remain stable, you will find market buoyancy to continue.

Mutual funds will continue to get large inflows as investors have experienced good returns over the last few years. One good thing which has happened in the Indian mutual fund industry is that we are receiving money in the form of a systematic investment plan (SIP), which is the best way of saving.

Is the concern over froth in small and mid-cap segments still there?

There is no froth. The rise in small and mid-caps is a reflection of how the width and breadth have been widening in the country. As per statistics, investments in infrastructure in railways have benefited around 250 allied industries. Investments in the power sector have benefitted most of the companies who have been suppliers of materials to the power sector. So, allied industries get an opportunity to grow because the market’s width and breadth are widening. The reflection of (growth in) small and mid-caps, is a reflection of India’s progress in economic activities. Therefore, it cannot be considered as froth. One or two companies would have not performed well also but those are one-off cases.

Froth is something about how you see the valuation. Somebody will see a valuation of 50 times costly whereas someone will see a valuation of 50 times not costly. If you see growth coming in higher than in the past, then a 50 times price-to-earnings (PE) multiple is justified. Normally, small and mid-cap companies grow faster than the bigger companies.

What should be the strategy of retail investors when investing in small and mid-caps?

Investors should invest in small and mid-caps as part of asset allocation. If one invests Rs 100 then about 50-60 per cent should go to large, flexi and multi-caps. The rest should be invested in small and mid-cap but with an investment horizon of five to seven years.

What is your view on the recent rise in PSU stocks and their high valuation?

It is a re-rating story. Most of the PSUs (public sector units) have relevance in the system. They have been built for building the government infrastructure over a period of time. This time the potential of these companies was unleashed. The re-rating has happened because their underlying business strength has improved significantly. I think most of the public sector companies have become efficient by way of leadership change, balance sheet strength, order book positions and by participating in the overall growth momentum in the country.