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00:00Hello and welcome to NDTV Prophet. I am Muralidhar Swaminathan. We on NDTV have been bringing
00:24expert voices since yesterday after the budget was presented. Today we are bringing in S.
00:32Narain of ICICI Pro AMC. He needs no special introduction. Narain is one of the leading
00:39voices in the mutual fund industry and the markets. Narain, welcome to the show. Thanks
00:44for joining us. Okay, my first question. What are the big takeaways from the budget for
00:52you? See, basically, you know, this is not the first budget presented by the NDA government
01:00or by the Honourable Finance Minister. We have seen a situation where over the years
01:06they have committed themselves to very good macroeconomics, very stable macroeconomics
01:13and kept the country on a road where they are very, very clear that you have to handle
01:18fiscal and current account and everything in a very, very good way. So this is part
01:25of the trend. So, you know, we all want some fireworks of some kind, but then they keep
01:32things very stable, macro so stable that India has been one of the countries where the bond
01:41market, the currency market, everything is very, very stable at this point of time, thanks
01:46to the macro at this point of time, then there is nothing like, you know, something which
01:52has drastically changed from two days back to today. That's why even the markets haven't
01:58drastically changed from two days back to today. Right. So, very clearly, I think, as
02:04the Prime Minister himself has been saying, you know, the roadmap for 2047 has kind of
02:12been laid out. So, from your reading, what we require is sustained growth. Do you think
02:20the specific areas of focus in the budget will help us achieve that sustained growth
02:26of 7% plus? I think, ignoring not just the budget, I think overall I would say that,
02:35you know, if you look at the last five years, the kind of growth, for example, we have seen
02:41in services exports due to global competency centers set up in India has been just fantastic.
02:47And so, we've seen very, very sustained growth on the services side, particularly export.
02:55There was a time when, you know, we had exports only of software. Today, we have got competencies
03:02centers set up by so many multinationals in India, which are focused not just on IT,
03:09but on all kinds of services supporting their global outfits. So, on that area, we have seen
03:16that. Now, the challenge actually is to create a situation whereby we are able to do that in
03:23manufacturing and for that budget is not the only document. We have to continuously keep improving
03:30the cost of product, cost factors of cost of production on the manufacturing side, whether
03:36it is logistics, whether it is land, whether it is power, whether it is labor, everything,
03:42you know, and there is a continuous challenge because it is not that our competitor countries
03:50like Thailand or Vietnam or all those countries are not also trying to do the same thing.
03:57So, even though, you know, there is a China plus one strategy and a fantastic work done on PLA,
04:04which is not part of the budget document per se, I think there are continuous challenges
04:10because we have adequate competition in that area, unlike what we have seen on the services side and
04:17there, the effort that needs to be continuously done to ensure that our power cost is reasonable
04:23or logistics cost is reasonable and land cost is reasonable, I think is a continuous onward journey.
04:30Raj, you know, typically, we are a consumption driven economy and to a large extent, I find that
04:42the capex, of course, is 11.1 lakh crore, but the government has very clearly, the finance minister
04:49has said that they are not going to increase it further from what they did in the interim budget.
04:55So, the ball is now in the court of the private sector. Do you think private sector is not doing
05:01enough to go for mega projects or scale that is required for us to sustain this kind of a growth?
05:10I find, you know, we at ICICI find this entire debate on private sector capex very
05:17not so logical. See, let us assume you are a cement company and you find that your capacity
05:26is utilized. Why would a cement company not put more capex? Suppose you are a two-wheeler or a
05:33four-wheeler company and your existing capacity is fully utilized, you put up more capex. So,
05:40I do not think this debate on this entire private sector capex is justified at all,
05:48because every company will act on its own interest. Some of the problems that are there
05:54is to do with the fact that Indian corporate sector is in fine federal and in great shape.
05:59So, instead of borrowing from the banks or projects or from financial institutions to
06:06put up projects, they can just do it with the internal accruers that they have that, you know,
06:12you do not see projects that are there. And second is some of them are now not putting up
06:20grassroot projects where they need to actually set up from the way from buying from land, etc.
06:28And land is not costly in India. I am sure land is much costlier in India than in most
06:33other countries in the world. So, we have a situation where they are doing grassroot
06:38projects at this point of time. So, this entire debate on private sector capex is quite illogical
06:45because of the fact that many of them will do it if it makes sense to them and why would they not
06:50do it. So, as the sectors get fully utilized, they will do it and we are seeing it across
06:57all the companies that we cover at ICICI Prudential, that most companies which are
07:02doing well and are using their capacity fully, they are doing capex and expanding. Are they
07:08doing it in new location? Are they doing it in existing location? Many of them are doing it in
07:12existing locations. I think that is a very, very important insight that you have given to us. You
07:19know, it is important to distinguish between capital requirement based on business, based on
07:27growth of individual companies as opposed to the country's ambitions, if I could say.
07:33The next important issue, Naren, is about jobs. You know, this has been a serious concern. There
07:41is growth. We have had tremendous sustainability in terms of growth and we are the fastest growing.
07:47But in terms of jobs, there has been a huge problem. The budget this time around has
07:52specifically taken the route of incentivizing employers to generate jobs. What are your
08:00thoughts on this? I think it is a fantastic step. I think, you know, we have to encourage
08:06job creation by employer. You know, encouraging job creation by the state government or central
08:13government is not a way. I think the step that the government has done this time,
08:18both through the apprenticeship process and the other process that they give incentive for
08:23the companies to hire, particularly people who are paying less than a certain amount,
08:28is the right way forward. And I think the model is absolutely correct and logical at this point
08:35of time. And that is the right way. And I think we are very, very impressed by the way that
08:41government policy has been done in this budget in this area. And that will lead to skill development,
08:47which is much required, I suppose. Yes, yes, absolutely. If you look at all the
08:52areas where we have actually gained in skill development, whether if you look at IT or
08:59whether you look at chemistry and drug area, all these areas, the skill development has happened
09:05because of these kinds of things. And the step taken by the government this time to do it is,
09:10I think, a great step in the long term. Whether it will help in the next three to six months,
09:17it may not, but I think this will clearly help in the long term. Okay. The other key area which
09:23is very critical for India to unleash its potential is the MSMEs. This budget is again
09:31focusing on MSMEs, especially their credit needs. Now, that's a huge problem for MSMEs. Now, their
09:38cost of credit, even during normal interest rate regime is very high. What are your thoughts on
09:45this? How do you think this will help the MSMEs unleash their potential? I do not know. Maybe,
09:53you know, I have worked for 35 years and we have seen in 90s people paying 16, 17, 18 percent.
10:01Today, even MSMEs, many of them, which are financially in good shape, I think they pay
10:07single digit 9, 9.5, 10 percent maybe. So, you know, I think it is important for MSMEs to practice
10:16good financial management and have good balance sheets. And they do it. I think today there are
10:21so many providers that their borrowing costs are also more reasonable. I've seen unreasonable
10:26borrowing costs in 90s. I don't see that at this point of time. I think the challenge has come
10:32to MSMEs if they don't have good balance sheets and they do not have good profit and loss around.
10:38And, you know, I'm not very clear what should the government do? What should the lenders do
10:44with all these kind of MSMEs? And if they have competitive advantage and they are actually
10:51going through only a temporary downturn because of some industry related issues, then it is fine.
10:57But if they are actually uncompetitive and they do not have any competitive advantage,
11:02should they lend more and more money to just survive or prevent them from dying? This is a
11:09question I do not have clear answers. Yeah, very important thought. I think,
11:14again, as you rightly said, it's not just making funds available, they should be competitive. But
11:20as an aside, you know, still investors love to invest in small and mid cap stocks. That's
11:26where they are making a lot of money. Yeah, but when the government talks of MSMEs,
11:33they are not talking of that segment. They are talking of a segment much below that.
11:37Today, if you look at mid and small cap stocks today, most of them are able to do QIPs,
11:42they are able to do disinvestment, they are able to raise money in the form of
11:45price equity very, very easily. So for them to raise money is not a problem at all. But they
11:51are not MSMEs. I would say they are one step ahead of MSMEs, they are much bigger. And in SME IPO,
11:58where we are not participant, I think we are seeing some excesses there in equity valuation
12:03there. But the problem is not lending there. The worry for me is the equity investor there and
12:09then the challenges I'm worried about is the retail investor who's investing in the SME IPO.
12:15Future funds are not connected to that segment in any way. But there we are worried about the
12:20retail investor there, not about the issuer. So that brings me to the specifics. The most
12:28important issue that has been talked about and some action in the budget is the F&O trading.
12:34The huge volumes that we have seen in F&O and the surge in trading in F&O. Finally, we have seen a
12:40hike in STT for F&O. Do you think this will dent the F&O volumes or will the F&O trader continue
12:50to trade in spite of this? Not at all. The increase has been very nominal. So I don't
12:55think it will have any impact on F&O trading in any way. Because it's not that 0.0625% becoming
13:030.1% is going to change the F&O trading. And I see the challenge is something different.
13:12Do investors understand the risk of F&O trading? Because if you have a one way bull market after
13:182020-21, people don't understand the risk of equity as an asset class. And that is the biggest
13:26challenge that is there. And we at ICICI Prudential keep talking of asset allocation,
13:32asset allocation and asset allocation. But people keep telling us why don't you talk equity, equity
13:38and equity. And that is a challenge that we have at this point of time. Because equities have not
13:44created any risk for many years at this point of time. They have not given any meaningful decline
13:51of even a decade at 10%. So that is a challenge. And so if it doesn't give a decline, people don't
13:57lose money in F&O also. So this is the challenge which we keep grappling with at ICICI Prudential,
14:04how to explain to investors that equity market carries a risk. And that is a challenge because
14:11if the equity market never declines for extended periods of time, then the F&O trader also tends
14:20to overtrade because they don't recognize the risk of equity market. And that is what a famous
14:26economist called Mr. Minsky wrote an entire theory which finally played out in the global
14:32financial crisis in USA in 2008 in real estate. Naren, you alluded to the fact that investors,
14:42equity investors should also understand the risk. Now, we have been in a very kind of a prolonged
14:49bull run and everything looks very nice. But at this stage, in spite of the increase in the capital
14:56gains tax from long-term capital gains tax, especially from 10% to 12.5%, the market seems
15:02to have taken it in the stride. Is it because we are all blind to equity risk? No, no. See,
15:09first of all, capital gains tax plays after the profits are made. So if you have made 25% profit
15:15after tax instead of 31.5%, maybe you will make 30 or how would it matter? So I think the sensible
15:26way in which the government has handled when the market can bear it, you increase the tax.
15:30And I think both the finance secretary, Dr. Swaminathan, and the revenue secretary,
15:35Mr. Sanjay Malhotra, pointed out yesterday very clearly that most of the profits are being made
15:41by people in the higher tax brackets whose actual tax rate is much higher than the capital gains tax
15:47rates on both long-term and short-term. So I think this is something the market can bear at this
15:54point of time. So I don't think this is an issue. Right. Okay. That's not an issue. That's on the
16:00brighter side. On the brighter side, one more important thing, if we leave out the small
16:06increase in standard deduction and stuff like that, the finance minister wants to do a comprehensive
16:12review of the Income Tax Act, which has been, I think, pending for a very, very long time,
16:18the 1961 Act. There have been some changes here and there. What are your thoughts? That could be
16:23a very important part or role to play in raising more revenue and stuff like that.
16:32I don't think that revenue is really the problem. I think litigation is the problem.
16:37I think if you look at the revenue on direct tax side in the last three to five years,
16:42I don't think the government is cribbing about the increase in revenue. I think they've been
16:46getting good increase in revenue because of the brilliant work done on computerization done,
16:52that when you file the return on July 31st, almost every source of income that you have
16:58gets automatically populated through that 26 days or whatever it is. So I don't think that revenue
17:05is hardly the problem at this point of time for government of India on the direct tax side in
17:10individuals. The challenge is only litigation and what can be done to cut litigation and unnecessary
17:18and unnecessary debates on litigation, etc. This is what I think. I have no expert in tax law
17:24and litigation, but I think direct taxes have been moved beautifully on the retail side in the last
17:32five years. And I don't think the objective of the entire review of the direct tax code is to
17:38increase revenue. Sure. Okay. So let me just come back to one more specific. Which are the sectors
17:47you would focus on at this point in time? You know, the market has been looking at
17:52PSUs, defense companies, the railways, based on the budget, which are the sectors you would like
17:59to focus on? We don't look at today, you know, budget has to be looked at as only one event,
18:06and it has been very well done by the government of India, but it is only one event. See,
18:12there are other things like GST Council, what happens globally, what happens to Fed,
18:16what happens to interest rates globally, etc. How does the Reserve Bank handle interest rate
18:22policy? What happens to crude oil? So many factors are there, but from a sectoral point of view,
18:28we've been positive on banks because it is a sector which has done very badly,
18:32but even after the budget, it has done well, because the challenge for raising
18:36deposit for the bank still remain. And we do like pharma in the near term, because sectorally,
18:43at this point of time, between all the defensive sectors, it has been one thing which is
18:48not done as well as the other sectors over a longer period of time. And recently,
18:53the consumer staple sector has done extremely well. So we like pharma. And insurance is another
18:59sector which hasn't done too well over the last four, five years. So it's a sector we like. So
19:05these are three sectors we like at this point of time on a relative basis.
19:10What about FMCG? FMCG has been kind of a laggard and it's kind of catching up only now.
19:16Do you think that sector would come back considering the focus on jobs and welfare
19:22and the kind of revival in rural demand? How do you view FMCG?
19:27After a long time in some of the funds which are directly managed, we did buy some of the
19:32consumer staple stocks after being negative for a long period of time. If you look at some of the
19:36stocks, they've gone up 25% in the very recent past in no time. So today, after a 25% move,
19:44we are reassessing whether it makes sense to buy them or not to buy them. Is it time to sell them
19:49or is it time only to hold them? There is that process of reassessing. Actually,
19:54it's one of the sectors which has done extremely well in the recent past.
19:58Let me shift focus to slightly broader issues. I'll go back to the issue of returns from the
20:07market. At this stage, after getting past 24,500, what kind of returns should one expect,
20:17assuming long term investors? Should one be looking at 12% or 15%? What is a reasonable
20:25rate of return one should expect from the markets? I wish I could give you a number.
20:31If anyone gives you a number, it's only some of the people who have the ability to give numbers.
20:39I don't have the ability to give you such numbers, but the market is not cheap at this point of time.
20:46And to give a number at this point of time, what we've been repeatedly telling people is
20:52practice asset allocation at this point of time. Invest in equity, debt and gold.
20:59Follow an asset allocation strategy. Follow a multi-asset strategy. We were a bit worried
21:04about gold, but after this big drop in customs duty yesterday, gold has crashed domestically.
21:09So that has helped. Clearly, that again, we can talk of multi-asset again starting today.
21:15So I would say that clearly, we are believers in multi-asset strategies. We are believers in
21:20asset allocation strategies. We are believers in any product which does more of asset allocation,
21:27like whether it is equity and debt or a balanced advantage kind of strategies,
21:33anything which involves investing in both equity and debt, rather than taking a call only on equity
21:40at this point of time. And it's very tough to predict returns. I think anyone who's predicted
21:45returns have gone wrong most of the time. And I would refrain from trying to predict that on a
21:52channel like yours, because then I'm sure to go wrong and more people I meet that say you told
21:58this on this day. So I would refrain from giving any numbers. I fully understand, but I will circle
22:05back to equities because everybody puts a lot of money in equity funds. You said the markets are
22:10not cheap, which is a general view. Are you sitting on cash? If so, how much or how do you
22:17deploy in this kind of a market? You know, we have a tough responsibility of, you know, we have
22:25collected this NFO called Energy Opportunities and we have to manage that public money in the right
22:32way. Having said that, our basic approach is that we have a scheme information document
22:40approved by SEBI for each of the strategies that we run. And we have to follow that strategy and
22:48look after the investor's interest based on the scheme information document approved by the
22:53regulator. And that is the approach we take. Overall, our view is at this point of time,
23:00do asset allocation. And we are not cheerleaders for the market only on account of valuations,
23:07not because of fundamentals. We are very positive on the fundamentals. We are very
23:11positive on the macro, but we are not cheerleaders on the market because of valuation reasons,
23:17more so in small and mid-cap. But even large caps are no longer in a framework where you can say
23:23that they are coming to the table twice or something like that. Again, due to valuations,
23:28there has been no problem with the fundamentals of India or the structural long-term story of India.
23:35And that is the reason we believe that systematic investing in large cap or
23:40fixed-cap kind of things continue, but the markets are not changed.
23:45So, which means you will deploy incremental cash only on debts?
23:52No, we have to, we follow the principle of being in line with scheme information documents
23:58in each case and that is what is the framework that we follow in every fund that we manage of
24:06every scheme and that is the model. So, this concept of having cash or
24:12doesn't exist obviously in a strategy like Balanced Advantage, we have more flexibility
24:18and we have certain flexibilities to hedge, whereas in some of the other strategies,
24:23we don't have that flexibility. Right, very interesting and important
24:28insights from Naren for the investors. It's about not being a cheerleader, not
24:37doing table-thumping to buy stocks, but it will be long-term, it will be on fundamentals,
24:42fundamentals are strong, the prices might be high now. Thank you Naren for
24:47enlightening our viewers on what long-term investment should be.
24:50Thank you.