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TCS order, Accenture guidance do not lift the cloud over IT: Prateek Agarwal

Prateek Agarwal , Business Head & CIO at ASK Investment Manager , says even if there is some rural tilt in Union Budget, it would not bother him. Excerpts from an interview with ETNow.

ET Now: How are you looking at the government's rural focus in the upcoming budget?
Prateek Agarwal: Rural focus is always there. It is a matter of some marginal tweaks that keep happening from a year to the next one, because in a given year a lot of spends will occur that what was committed the year before. What gets planned now can only take place deep into the next year. Which means fund allocation for those areas would not be very high. That is how things happen. I am not too worried about the stress on the budget because of a renewed focus on the rural sector. Most of it would be continuity. Yes, we should expect a marginal uptick in that allocation. Having said that, spend anywhere is good for consumption. So if one is playing that theme, that really continuous to work well.

ET Now: The big news is in the IT sector today. First, Accenture has upped the lower end of its guidance spend and then you got TCS winning a sizeable order of $2.5 billion from Nielsen. The commentary coming in from Accenture is interesting; they are saying the order pipeline is looking higher for next calendar year and that client spends are beginning to look up as well. Would you say that part of this positivity is going to rub off on the Indian IT sector as well? Or does IT continue to be an avoid?

Prateek Agarwal: No, it is continuing to be a place where there is a lot of stress. This stress is on account of billing rates not moving up even as wages keep on going up. That is putting a high amount of pressure on margins. There is only so much that automations can achieve. All of these would be bump for earnings, but only by a tad. We do not see that as a great place to stay invested now.

ET Now: Next big news of course is in the entire Adag Group. Reliance Infra is actually selling out to Adani Group. Then there is this buzz around Reliance Communications as well. Do you think time has come to finally take a relook at ADAG Group, maybe a bottom is in place even if no significant upside from the current levels for some of these companies? Because, now you see their aim and motive to bring down debt.

Prateek Agarwal: Fair enough, but one needs to be clear what would be left after things are sold for the continuing business. Only then can one value it and see if the current stock prices are reflective of that or not. As of now, it is in a state of flux.

ET Now: Give us your sense on how you are approaching the consumption theme. We keep asking this to our guests every single day. Everybody wants to talk about consumption, no matter how expensive it gets. One is still willing to buy it at any price. So is it a trade that is not getting tired any time soon?

Prateek Agarwal: Yes. Our thesis is like this. We are in a bull market for at least four years now and all the cheap areas in the market place have been discovered – be it metals, commodities, chemicals, or PSU banks. Stocks have done very well there over the past few years. So while those spaces may hold, going forward clearly the growth – not one year but multiyear kind of growth – in earnings would be in focus. That is where consumers really stand out; that is the only space where you can build that kind of growth outlook. So it is a large basket. It includes auto. It includes FMCG. It includes a lot of stuff. We really believe in the space. Second, the benefit of GST would accrue to spaces where the competition from the unorganised sector is very high and consumers are one such space. As the move away from unorganised to organised happens, consumers would have some tailwinds to their benefit. Lastly, we should expect tax cuts in the budget. In the US, corporate tax rates used to 35, higher than that in India. They have cut it down to 21. Most of the developed world has rates just about there. So, it stands to reason that we would also see a rate cut, maybe in a staggered manner. Two budgets back, the Finance Minister had made that point. Last budget, we did move quite a few items down there. So, the whole idea is that rates would be cut.

Most of the infrastructure capex-related sectors actually pay less than 22 per cent. It is only the consumers, asset-light businesses which pay full tax rates. Very clearly these are the businesses which will benefit from any reduction in tax rates. So that feeds into the overall theme as well. I think in today's context, earnings projections that are being seen do not build these into numbers. Obviously, these factors are not certain, but if they were to occur, then the bumpup in profits of these companies could be pretty decent. That will correct the valuations downward substantially.

ET Now: When you say the shift to organised from the unorganised theme is not over yet, what is it that you are willing to bet on? Because most of these themes have played out well year to date, what with the moves on the Titan's coming up, some of the retail plays as well have held out well. Where is it that you sense significant headroom within this theme?

Prateek Agarwal: Let the e-way bill get enforced, let us say the date is in February next year. After that, we should start expecting a substantial move into the organised space. So that would be a big trigger. These are initial days. One really needs to see it over two to three years. We really believe a lot of these businesses could be significantly better shaped than we are projecting today. And these would be across industries. So, Titan yes, we have seen very strong earnings and the management has also been talking about it. They are a key beneficiary. But this is something which should happen practically across the consumer industry.

ET Now: Anywhere you would be contrarian in the market right now? IT?

Prateek Agarwal: I would believe things have bottomed out. So we do not really believe IT has a downside from where it is. But on the upside, how much money you make is where we have a disconnect. We do not believe it will deliver significant EPS growth and, hence, the amount of money somebody may make in this space – at least in the bigger names – would not be substantial.

One space I would focus on is NBFC. There, the small-ticket loan NBFCs – you may call it microfinance, or you may call it gold – look good. Over time, people will understand that they have a particularly large and relevant expertise for the day. So if low-cost housing is the focus of the government, they are the ones who are in a good position to lend to that segment, who have a already readymade borrowing segment. So franchise that these kind of companies have fits in very nicely with the policy environment, with the government thrust of the day. Because of the stress experienced after demonetisation and changes in regulations, this was a space that was given a miss. It is coming back, but I really believe this is the space that could do well in the New Year.

Similarly, pharma has had a very difficult period over the past two years. Some of the names there threw up decent value. In fact, given the negativity it is now beginning to be attached to the US market place, while it continues to be the most profitable place in the world to do pharma business. Valuations of some of the companies build in hardly any value. We believe that is unfair. Some of the pharma names can throw up surprise performance on the bourses next year. So, I would keep my eyes there.

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