'India story continues unabated'

Vinay Khattar, head (research of WAIS), Edelweiss, outlines his expectations from the Budget, his investment strategy and the direction of the markets:

You seemed to have played out the volatility quite well, after having sold off in the end of December and early January, you have resumed buying in February? What was the secret of getting the timing right?

Broadly, we were not comfortable with the market at 6,300, due to its very expensive valuations.

Moreover, the negative news on the Indian Macro situation in terms of inflation and consequent tightening in the interest rate regimen looked very risky to us.

Added to this were the issues on governance, which we believed could make FIIs jittery. We were, therefore, uncomfortable staying in the market.

However, after Nifty correction of 16-17 per cent from the top, there were stocks available to us at reasonable valuations, so we added the same to the portfolio.

Also, if you see the stock selection, we have largely added consumption stocks, as we are bullish on this sector.

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Can you explain the logic behind your fresh investments in stocks like Suzlon, Jet Airways, SBI and Tilaknagar Industries?

We selected the stocks that had corrected significantly in the current market fall and were also important players in their respective sectors/segments.

SBI, Jet Airways and Tilaknagar are also part of the consumption basket and we are quite bullish on this theme.

In addition, results for some of these players have been quite strong, as in the case of Tilaknagar, which reported strong volume growth.

Suzlon is beginning to get new orders in the domestic markets, which had earlier been a big concern for the company.

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It's almost halfway through, and so far you have outperformed the benchmark with gains of around 9 per cent, as against the S&P CNX index returns of -3 per cent? What would your strategy be for the next six months?

We will continue with combination of thematic and stock-specific approach. In the current rally, we are playing the segmental leaders.

Going forward, based on the market conditions, we would like to take contra bets on infrastructure and construction sectors, as well as companies with higher leverage plays.

However, this would be a factor of the inflationary and interest rate conditions in the economy.

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We saw a steep 12 per cent correction, followed by a pull-back in the markets. Does the macroeconomic picture indicate further weakness for our markets?

Our sense is that we are not completely done with the correction as yet. The inflation concerns remain high and so does RBI's hawkish stance on the monitory policy.

Simultaneously there are early signs of industrial slow down as IIP numbers are beginning to weaken. In addition the current account deficit and fiscal deficit numbers are not encouraging.

Also FII preference for developed markets as economic traction continues to gain strength in those economies will keep the FII inflows in EM under pressure.

This therefore does not represent an attractive picture for the immediate term.

We however strongly believe that the India story continues unabated with strong nominal GDP growth rate as well as robust tax collection being reported for this year.

Agriculture sector has shown strong growth and that bodes well for consumption demand.

We are also likely to have considerable power addition in the next few years which is likely to aid demand for goods and services across sectors.

Therefore this correction represents an excellent opportunity for the long-term investor to accumulate stocks of choice at attractive valuations. We are recommending our clients to begin accumulating some of the stocks that we like.

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With the Budget round the corner, what are your expectations from the same?

We expect the key focus of the budget will be on fiscal consolidation. The government is likely to pay attention to tackling structural inflation by encouraging investment in agriculture, cold storage chains and reduction in mandi tax.

We also expect undertaking policy reforms to support growth like addressing the challenges to land acquisition, infrastructure bottlenecks and infrastructure financing, among others.

It is also expected that after years of substantial expansion in the social sector spending, the government is likely to go relatively slower on its inclusive growth agenda, given limited fiscal headroom.

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On the industrial front for most sectors we have benign expectations. We expect many services, which are currently tax exempt, to come under the purview of taxation.

Government may not extend the exemptions granted to various sectors (IT sector - extension of sunset clause on tax exemptions for STP).

We also expect increase in excise duty on FMCG (especially cigarettes) and auto sectors (additional excise on diesel cars).