We spoke with Sunil shortly after the FM's Budget speech to get his perspective on the road ahead for markets, post Budget. Sunil says his key take-aways from the Budget are that it is entirely consistent with the vision spelt out by the Government 6 months ago and at the same time, it clearly lays out an execution road map to realize the vision. This, together with action being taken at a policy level, reinforces Sunil's conviction that growth momentum will pick up in the near future. He however strikes a note of caution on news flow driving some stock prices too far ahead of fundamentals - there is clearly need to be a lot more judicious going forward in picking good stocks at reasonable valuations.

WF: What is your key take-away from this Budget?

Sunil: The key message from this Budget is that the FM has carried forward the intent and priorities of this Government, which have been clearly articulated over the last 6 months. One cannot look at this Budget from a 1 year perspective - one will have to see it from a 3-5 year view, to appreciate the direction. Whether it is Make in India, Swachha Bharat Abhiyan, Ease of Doing Business - all the major initiatives of this Government form the core of this Budget. Being consistent with the vision is a very good step. What is also good is the long term road map that this Budget has laid out to achieve the Government's priorities. So, when the FM talked about corporate taxes, he gave a four year roadmap - and this move is a very critical part of the Make in India thrust. When he talked about the National Investment Fund, he made it very clear that the first year allocation will be Rs.20,000 crores and from then on, there will be annual allocations made into this Fund to help it realize its goals. Allocations to roads and railways has increased substantially, but more importantly, the 5 year goals for both these infrastructure areas have been clearly spelt out.

The fiscal deficit number of 3.9% is not at all disappointing in my view. We must remember that when the FM took on the target of 4.1% for this year, people were expecting it to slip to 4.5%. Now that we are at 4.1% and the roadmap over the next 3 years has been laid out going down to 3%, I think it is very reasonable and pragmatic.

Overall, I think it is a growth enhancing Budget, and one that is completely aligned with the direction that this Government has clearly spelt out 6 months ago.

WF: Are there any disappointments - any measures you expected, which did not materialize?

Sunil: The human nature is such that we always want more! I think the only thing for a common man that was perhaps missed out was an incentive to buy houses. The FM talked about 6 crore houses, about housing for all - it would perhaps have been good if this was followed up with higher tax incentives to buy houses.

WF: From an equity market perspective, last quarter's results were disappointing and growth is struggling a bit, and this Budget shies away from near term steroid shots but is focused on the longer term game plan. What are implications from a near to medium term perspective for equity markets now?

Sunil: You are right that growth momentum is not quite there yet - but expecting healthy momentum within 6-9 months of the new Government taking charge, is I think quite a tall order. I think the building blocks are all in place, and from here on, execution is what is going to get us to the level of growth we aspire for. This Budget does give a roadmap for executing the Government's vision - so I think we are clearly on the right path. Plug and play in 5 UMPPs is a great example of execution, and the FM said that this model will be adopted in other infra projects as well. It is this kind of execution that will enable growth to get to the next level.

Coal block auctions have taken place, and from April onwards, the winning bidders will be able to get coal - which as we know was a key bottleneck for a number of stalled projects. This should give economic activity a good boost in the coming months. This Budget has given special incentives for projects in Andhra and Telangana - this again will be a significant driver for a number of stalled projects in this region.

As far as corporate profits is concerned, there are two main drivers : demand should pick up and interest rates should decline. Consumer demand always picks up with a lag. We think that the impetus will come initially from stalled projects getting off the ground - and there are clear signs of progress on this front. Consumer demand will come in later as a growth driver.

As regards interest rate cuts, it is very clear to us that the Government and RBI are on the same page as far as direction of the economy is concerned. We don't see RBI getting worried about the fiscal consolidation roadmap that the Government has laid out. Our view is that interest rates will come down in the months ahead.

A combination of these factors will bring corporate profits onto a sustainable growth path. December quarter numbers were disappointing largely due to huge inventory losses caused by the collapse in raw material prices due to the crash in commodity prices. March quarter should be a much more stable quarter, but real growth in profits can be expected only from the September 15 quarter onwards.

I however would like to sound a note of caution here. Some stocks and sectors are moving too far ahead of the fundamentals. News flow is driving some stocks way beyond justifiable levels. You have news flow on defense, and every stock that has however large or small exposure to defense manufacturing, starts soaring. You get some news flow on railways, and the same result is seen in the market. There are clearly opportunities in these sectors, but you have to be very careful about the companies you are investing in, and the valuations at which you invest.

There is another angle to equity markets which I think is important. This Budget has cleared the air for investors - whether foreign or domestic. That is a significant positive, in our view. For FIIs, deferment of GAAR, clarity on MAT, availability of the AIF route, and clarity on taxation for private equity and REITs - are all positives, because many of these were irritants that were coming in the way of more FII inflows.

For domestic investors, tax breaks on retirement savings, retention of existing capital gains provisions and tax breaks on MF scheme mergers are all welcome steps that will help sustain the positive momentum of retail savings into equity markets.

WF: In terms of your equity strategy, between large and midcaps, what's your preference now and between cyclicals and defensives, what do you favour now?

Sunil: We continue to like private sector banks, we think IT as a sector will continue to grow in a steady manner, we believe pharma continues to look attractive. Urban consumption as a theme is going to be a big driver going forward. Cement is also a sector we like.

On capital goods, we look at two key aspects when considering any stock. One is that the balance sheet should not have any stress in it. Secondly, visible earnings must justify current valuations rather than the hope of earnings 3-5 years from now, which is already getting discounted in the price.

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