CV1-I2-2- Interview-Sahil Kapoor speaks on Indian Financial Markets

“My trading philosophy entails tracking major macroeconomics data and using a

relative strength comparative approach to taper down to what is to be bought or sold.”

………….  Sahil Kapoor, Chief Market Strategist, VP- Edelweiss GWM Research

Sahil Kapoor Interviewed by Prof Sharad Jha

Sahil Kapoor, an Indian Stock Market expert, analyses the key aspects of the global and Indian economy to arrive at a rating for Indian stock markets. His area of expertise involves macroeconomics, sectoral analysis, chart based analysis and options markets. He helps clients in understand the direction of the stock markets and when to be optimistic and cautious with investments. Prof Sharad Jha, Asst. Director, Institute of Financial Market, ITM Business School had an opportunity to note down Mr Sahil Kapoor’s views on the current Scenario of Financial Market in India. Prof Sharad Jha, Asst. Director, Institute of Financial Market, ITM Business School, Navi Mumbai interviewed Sahil Kapoor

Q1. Do you think current economic situation is right time for the retail investor to invest?

Retail investor should invest over the long term. Investing, especially in equity markets requires skill. A large part of retail investing community has been focus almost entirely on physical assets. Gold and real estate has been the mainstay investments of Indian public at large. This is now changing, the force behind this change in a durable and steady level of inflation. Financial savings have increased significantly over the last 5 years. Physical assets accounted for 70% of savings of Indian Households, while financial assets were merely 30% in FY12. In FY17 financial savings stands at 50% and physical savings are now at 50%. This is reflected in now a near $750mn (INR 5000 crores) inflows into Mutual Fund SIPs every month.

For retail investors, regular investments into financial assets should be the strategy. Because retail investors lack the skills to time either economic cycles or business cycles it is prudent either to hire a financial adviser or investment regularly to capture all market cycles. Interestingly equity markets have returned nearly 15% CAGR over the last 15 years. So, every time is the right time.

Q2. Do you feel that demonetization has created positive impact on market as well as on investor community?

The biggest impact of demon, which is visible today is the increase in direct tax collection, increase in online transaction and formalization of the economy. one aspect where the expected benefits didn't accrue is the return of nearly all the specified bank notes of higher denomination. However, we believe the higher tax compliance and more online transaction is the real factor here. An online trail of transactions will create higher tax compliance, an online record of transactions will create a platform of better credit appraisals and broad delivery of credit. Demonetization is net positive over the long term. But short-term costs should be borne for now.

Q3. India role out 70-year tax system and implement GST, how it will impact the long-term growth of Indian economic

I see a twofold impact.

• Formalization of the economy. Informal and unorganised businesses account for more than half of India’s GDP and nearly 90% of employment. The shift from unorganised to organised sector would increase productivity substantially. Formal and organised businesses have employees, which are as much as 7 times more productive than unorganised sector employees. The wage gap is as large as 10 times in favour of employee of the organised sector. This could be a major source of productivity and growth gains for the economy
• The formalization of the economy would also help the government gaining in more revenue collection. Current the central government collects tax revenues, which are just 11.5% of the size of the GDP will certainly increase. Out of this total not more than 3% is the central government development expenditure. As the government revenues pick up due to higher compliance and wider tax base due to GST long term infrastructural and developmental expenditure can support the long term economic growth.

Q4. Currently the real estate sector is already bleeding, do you feel with RERA it will have positive impact?

RERA implementation has seen slow start with 11 states yet to notify final rules, only 7 states with functional website and 4 with permanent regulators. Project registrations have been good in Mumbai and Pune but slow in other key markets mainly due to delay in notification of final RERA rules by states. Pre-sales could slowdown in near-term though should normalize gradually as registrations pick-up. In the medium term, non-serious players may find difficult to adhere to RERA requirements and could exit business. This coupled with GST should help sustain current capital values. In medium term, less-capitalised/non-serious players may find complying with RERA provisions difficult, leading to partial/full exit from their projects. Th e serious/well-capitalised players should benefit from this with increased demand and higher realisations. In long term, it is expected that serious participants with the ability and willingness to comply with RERA continuing in business. The provisions of capital adequacy, full disclosures and strict penalties should lead to greater transparency and increased customer confidence. This, coupled with favourable long-term fundamentals, should benefit the sector.

Q5. According to you which all sectors are overweight and underweight?

Themes that we are focused on are as follows:

• Exports
• India’s engineering goods exports are growing at one of the fastest pace in recent times. Also, the growth rate is driven by acceleration in key markets like US and Europe. Moreover, select companies in these segments offers excellent company specific growth opportunities.
• Consumption
• Indian economy has been driven entirely by consumption. Over the last 10 years the share of consumption in GDP has grown from 55% to above 60% and it has been a key driver of economic growth acceleration. Multiple triggers like 7th pay commission, HRA allowances and most importantly low inflation and interest rates are beginning to rev up consumption.
• Affordable housing and banking
• Home construction, financing and building materials are three key areas, where opportunities could be profitable. This is driven by governments focus through the Pradhan Mantri Awas Yogna for rural and urban India. As per our estimates the housing market offers nearly $1.25 trillion opportunity over the next 5 to 7 years. Accelerating loan growth in retail sector also brings opportunities in banking sector.

Q6. What is your view on coming quarter result?

Q1FY18 saw earnings contraction largely because of GST led destocking, poor earnings for IT, Pharma, select Auto and PSU Banks. Part of the this is likely to recover as restocking has already picked up in July-Sept quarter. Q2FY18 is likely to register earnings growth more than 12%.