GST Will Cause ‘Significant Disruptions’ Through Added Compliance Burden, Says UR Bhat

Of course. There was a lot of uncertainty on the taxation levels but that is more or less over now. The issue about GST is not so much about taxation levels, as about the disruption it will cause is terms of ease of doing business because of the number of returns companies will have to file. Especially, small and medium enterprises will have a lot of problems complying with regulations, complying with filing so many returns for so many states. I think these are the things people will have to get used to. I think it will take a better part of the next couple of quarters at least, for companies to get used to it.

Well it shows that it (GST) has been priced in at market peaks. Markets seem to suggest that there is no disruption, that everything is fine and business as usual. I don’t think it will be business as usual.

The disruption may not necessarily reduce demand. Demand will still be there. As far as compliance is concerned, there’ll be a lot more effort required from the back offices of these companies in terms of compliance. There’ll be disruptions on account of that but it is nobody’s argument that demand will evaporate and the bottomline could also do well. But there is a lot that will be unsettled in the way companies do business, I think that will cause disruptions, not so much in terms of the bottomline.

Absolutely. If you see, the North Korean problem is still out there and today there was news of Chinese aircraft challenging U.S. military aircraft over the North China Sea. I think things are not very well settled, there is no equilibrium. And there are problems with the U.S. presidency. All these things can create further problems. You have elections in Europe which can throw up surprises. There are enough problems in South America, where Brazil is probably going to declare that they cannot meet their obligations. There are several problems there which can flare up anytime, but the markets don’t seem to suggest that. Against this backdrop, if something flares up, the market will see steeper corrections.

Every hike in interest rates in the U.S...couple of hikes or may be even three or four hikes may have been factored in. But even if its factored in, when it actually happens, we will certainly see some turmoil in the market. And who knows, going by the way the U.S. economy is doing – reasonably well – there might be further hikes than what the market is budgeting for. So if that happens. there could be be some effect on fund flows into India and India also may be take a u-turn as far as its interest rate trajectory is concerned; there might be a hike sometime soon. So that will again affect valuations.

I think this year is possible because they have come to neutral and the language doesn’t seem to be as dovish as it used to be. Therefore we may not be very far off from some hike, probably later this year.

The big turnaround has to happen in big public sector banks but we are probably quite some distance away from that. There is still accelerated accumulation of non-performing assets. That is a very serious problem that has to be tackled by the government; one of the problems that is yet to be tackled by the government. But that is where a big turnaround can happen. But otherwise corporate earnings have not been exactly ‘terribly disappointing’. Auto numbers are reasonably alright, private sector banks have done well, non-banking financial companies have done well And industrials also have done reasonably okay, better than what the initial expectations were. But I think the problem was largely with the public sector banks. And it’s very difficult for us to imagine that GDP growth can be accelerated without the banks participating in the financing of that growth. So I think something has to be done there.

As of now, we’ll stick to the private sector banks because they are rapidly gaining market share. Probably two-thirds of the market is still served by the public sector banks. But if you see over the last three years, the market share of the incremental business, I think it is dominated by the private sector, because public sector banks have hardly grown. But these are growing at 15 to 25 percent. So, therefore quite a lot of the growth has been captured by the private sector banks and that’s how they are gaining market share. Now, there are several things that need to be done before the public sector banks can show some growth. It is such a large part of the banking sector, that you cannot ignore it. So, the government has to be come out with some solutions, even though it is very delayed but it has to come with a solution. And when a solution does come about, I think they have the best distribution in town. So therefore, there could be lot of value resting there but the immediate problems have to be solved.

The alpha is very much there. Alpha could be huge, 100 percent plus. But you can’t time it very well. So it could be several quarters or couple of years or it could be two quarters. So therefore if you have faith that something would happen here you can as well be early because you don’t know when it’ll happen.

I think so. All growth finally happens because of growth in consumption and so therefore if consumption growth happen, these are natural beneficiaries. With the branded ones, there is always that aspirational target for ones lower down in the hierarchy to get there. So there will always be growth there. All said and done, you may always argue about stretched valuations but these are companies which are have ROEs which are unimaginable; these are 90-100 percent ROE companies. Therefore, there is a case for them to be valued like that even though we may quarrel that it is very high in comparison.

You have diversified plays there and you have pure plays. The diversified plays are for those who are slightly risk averse but the pure plays are for those who understand the business very well and see where the growth is going to come from. In both sectors there is growth but there are a few perennial favourites. I think there is growth there. On a bad day you should buy them. There is probably not much fun in buying them at any level but on a bad day I think you’ll get them at good prices.

When we see that valuations are stretched – at current understating of earnings growth I think valuations are stretched – probably across the board; there are no cheap stocks there. So the important thing is where could the delta come from in terms of earnings are not factored in by the market. That is where I said PSU banks, if the right decisions are taken, PSU banks can offer the huge delta there. But otherwise, the growth momentum even in the private sector banks and NBFCs will continue but some of them are stretched beyond imagination and they need to be shorted. But there is no great case for buying across the board.

The logistics sector has been running since people started talking about GST. Now the numbers have to come and only then the next leg of the run-up will happen. Or whatever expectations are there will have to get close to being realised. But I don’t think you can say they are cheap now.