India’s biggest and best-performing fund manager wants the government to increase taxes and reduce oil subsidies to trim the fiscal deficit, enabling the central bank to pare borrowing costs and stimulate growth.
“The economy is slowing and fiscal deficit is a core concern,” Prashant Jain, who oversees 887 billion rupees ($18 billion) as the chief investment officer at HDFC Asset Management Co., said in an interview at his office in Mumbai yesterday. “Oil subsidy is a problem. In the last four years our federal tax-to-GDP ratio has come down from 12 percent to 10 percent and is below where it ought to be.”
The Reserve Bank of India left its benchmark interest rate unchanged today, after data yesterday showed inflation accelerated for the first time in five months and as the central bank awaits measures to curb the deficit in the budget to be presented by Finance Minister Pranab Mukherjee tomorrow. Jain said he favors banks, oil and infrastructure companies because they have “meaningful value.”
A reduction in levies in 2008 to protect the $1.7 trillion economy from the effect of the global financial crisis has led to tax receipts as a percentage of gross domestic product falling to an estimated 10.4 percent in the year ending in March from a four-decade high of 12 percent in 2008, central bank data show.
“There was no compelling reason to cut taxes,” Jain, 44, said. “The tax cuts were not rolled back next year or even in the year after. I hope it is addressed in this budget.”
India’s economy has slowed for four consecutive quarters, reducing tax receipts even as subsidies and a job-guarantee program spur spending. The deficit exceeded the government’s full-year target in the 10 months through January and may widen to 6.1 percent of GDP in the year ending in March, according to Nomura Holdings Inc. and Kotak Mahindra Bank Ltd. (KMB), more than Mukherjee’s aim of 4.6 percent.
“In India, most changes take place when we run out of easier options, but things do happen and that is what makes us optimistic,” said Jain. “We expect interest rates to come down over time. If the fiscal deficit is corrected, the fall in interest rates will be quicker and sharper.”
Future actions will be toward cutting rates, the central bank said while keeping the repurchase rate unchanged at 8.5 percent. The outcome was predicted by 19 of 22 economists in a Bloomberg survey, with three forecasting a quarter-point cut.
“Notwithstanding the deceleration in growth, inflation risks remain, which will influence both the timing and magnitude of future rate actions,” the central bank said.
Jain’s HDFC Top 200 Fund (ITCT200), the nation’s biggest stock fund with 105.4 billion rupees in assets, has returned 29 percent a year in the past decade, the best performance among large-cap funds in the country, data compiled by Bloomberg show. Three other equity funds overseen by Jain are among the top 10 stock funds in the country in the period, the data show.
Lenders, including State Bank of India and ICICI Bank Ltd. (ICICIBC), India’s biggest, made up about 26 percent of the HDFC Top 200 at the end of February, a company fact sheet shows. Companies in oil, gas and petroleum products’ industries formed about 12 percent and those in construction and capital goods’ sectors totaled about 7 percent of the fund’s assets.
“We find value in banks,” said Jain. “Even in infrastructure companies, there’s meaningful value.”
The BSE India Bankex Index of 14 lenders sank 32 percent in 2011 and the 17-member BSE India Capital Goods Index plunged 48 percent, compared with the 25 percent drop in the BSE India Sensitive Index. (SENSEX)
“Oil companies are undervalued despite subsidy issues,” said Jain, declining to name individual stocks.
India’s state oil refiners sell cooking gas, diesel and kerosene at below-market prices to keep fuels affordable in a country where the World Bank estimates about 75 percent of the population lives on less than $2 a day. The government requires state-run explorers to supply oil to refiners at a discount.
Jain said he sees “merit in moving away” from producers of consumer goods as they are “priced close to perfection.”
The BSE India FMCG Index (BSETMCG) of fast-moving consumer goods climbed 10 percent last year. The gauge trades at about 29.2 times estimated earnings, the highest level since May 2006, according to weekly data compiled by Bloomberg.
The Sensex dropped 1.5 percent to 17,656.92 at 12:29 p.m. in Mumbai, ending a four-day advance. The 30-stock gauge has climbed 14 percent this year as foreigners poured a net $8.1 billion into domestic equities on speculation the central bank will ease monetary policy. The index trades at 15.5 times future earnings, compared with 19.4 times at the end of 2010.
“There is room for the price-earnings ratio to go up” said Jain. “The average long-term price-to-earnings ratio for the Sensex is about 17 times.”
To contact the reporters on this story: Rajhkumar K Shaaw in Mumbai at email@example.com; Shikhar Balwani in Mumbai at firstname.lastname@example.org
To contact the editor responsible for this story: Darren Boey at email@example.com