Indian markets have rebounded on positive global cues after Finance Minister Arun Jaitley adhered to FRBM targets even while presenting a Budget for Bharat.

Speaking to Bloomberg TV India, Quantum AMC Founder-Chairman Ajit Dayal says the focus on rural India and the desire to double farm income in the next five years can be a game-changer. While expecting capex cycle to pick up next year, he said India Inc will get back the much-needed pricing power and start posting better profits next year. RBI is also expected to cut rates by 50 bps soon, he said.

How is the market looking to you? What can we expect going forward?

Let’s rewind a bit and talk about August 2013 when India became part of the fragile five BRICS and the rupee took a toss to 68 to a dollar, the Sensex went down to 18,000-mark and looked pretty bad. And then the BJP elected Narendra Modi as the Prime Minister candidate in September 2013 and on the basis of that, the markets took a massive U-turn. There was a phenomenal expectation all the way up to the elections; the markets picked up to a new high, and that carried on till the second half of 2014, and then peaked in January 2015 to touch 30,000.

So at that point of time, the expectations of the investors were that because there is a new Prime Minister and a new government, India will be able to kick-start to a completely higher level of growth in GDP and, therefore, corporate earnings. By May 2015, the disappointment started setting in (because of) a lack of outcome from the Modi election, and a year after that China had big issues. So you have a situation in which investors have been disappointed and there is nothing great happening on the earning cycle to justify the higher BSE-30 level and NSE-50 numbers. So where do we stand after the Budget? There was nothing great for corporate India. There was no kick-start for corporate India’s earnings.

However, corporate India gave a sigh of relief that nothing negative happened either. The stock markets have gone up in India along with a global rally. But if you ask me what an investor should be doing at the 23,000-level Sensex, they should be buying. At 23,000-level, you should be a buyer in this market with a 3-5-year view.

When you say earnings are also picking up, are you saying that will also be a trigger going forward?

I think the answer to that question goes back again to the BRIC history. During 2005-07, when India went through its boom period and when Goldman Sachs thought the Indian economy was going to be a break-out economy, Indian companies got very excited.

They raised relatively cheap capital and cheap money, deployed it in factories in India and outside and increased capacity big time between 2007 and 2010. By the time the factories were built and ready, their demand for what they thought would happen based on an 8-10 per cent growth was not there. So you have got all these companies that have ramped up capacity, there is no volume growth, there is competition to get that lower margin growth and, therefore, profitability was not there. And on top of that, they have to start paying interest on the loans or debts they borrowed. There is depreciation charge when a new asset is finally commissioned and a factory starts producing something and can no longer be capitalised in your balance sheet as an asset, it starts running though your P&L and depreciation charge.

So corporate India will be hit by this triple whammy — there was low volume growth or there would be no pricing power; and because of no pricing power, there would be high interest cost that would burden them from the past debt that they could not repay; and then the depreciation.

So they had no earnings. Since 2010-11, we were all hearing that there is no capex going on in India. In a very strange way, that is fantastic for corporate India because there is no one building capacity. Demand is still growing on a marginal level from 5-6 per cent in terms of volume across most of the sectors. And in 2017, our estimate is that you will have a situation where the demand will rise to such a level that will prompt capacity utilisation of corporate India to increase, pricing power will come back to the hands of corporate India and they will be able to get better profits, and their earnings will rise for sure. The year 2017 will be a natural cycle. It will be nothing to do with the (legacy issues of the past) Congress government and nothing to do with the present BJP government, but a natural cycle from the high capex from the BRICS era and no capex from 2010 till now.

How concerned are you about the banking sector?

I’ll first put a disclaimer out there that in Quantum Long Term Equity Fund, which is part of the broad equity AMC and I am the Chairman, fund managers and the investor community have been seeing that there has been a lot of value in banking stocks in the last few months. In Quantum Long Term equity as an FII, we had over 30 per cent cash at one point in time in May 2015. And that cash level was there because we were selling stocks as the share prices were rising, including certain banking stocks that were going up in value. We had the cash from the sales. We looked around in the market, but there was no value as we define them. We sat on the cash as the market began to unwind after the China turmoil since May.

Of course, in the last few months, that cash has been deployed into stocks that are falling and our cash level is now below 5 per cent.

Some of the stocks we bought over the last few weeks and months have been, for example, State Bank of India and even ICICI Bank because the valuation now looks attractive. From a research and a fund manager perspective, the risk-reward ratio of buying into certain banks is looking attractive because the non-performing loan (NPL) problems may not be overblown. But we believe a lot of the bad news is out and the valuation reflects that. So in our view, it is very attractive. And it’s been a help in the last few years in the Budget.

There was some money announced for recapitalisation, and equally important is that the Reserve Bank of India has changed certain guidelines for recapitalisation of banks.

Therefore, the banking sector, while troubled, is not a disaster. Please recognise that SBI is the same bank that it was 12 months ago. Twelve months ago, the stock was ₹350 or ₹300-plus and now it fell to as low as ₹150-160.

I remember that line from the founder of SoftBank when he was asked in an interview a year ago: What has changed since the tech bubble when you were so wealthy? He said that he was the same person who is standing in the middle of the field. “The sun was rising and my shadow was long. And when the sun was above my head, the shadow was short.” So the case with SBI is similar — you have got the same bank with the same problem 12 months ago. And now the stock markets have suddenly woken up and we see that there are NPLs in the bank. That’s what SBI is all about.

How was the Budget and will it lift sentiment?

I think if you had closed your eyes and heard this Budget, it was a Congress Budget. It was pro-poor, which I think is absolutely fantastic. We always believe that Budgets that focus on rural India, including some of those announced by previous governments, were the best budgets.

The intent to get the rural economy up the ladder is extremely important. But in this Budget, this focus on rural India and this desire to double farm income in the next five years can be a game-changer.

What’s your sense of monetary policy trajectory?

When I speak to my fund managers, they say there is obviously scope to cut rates by 50 bps over the next year depending upon the world economy and the monsoon. My view is a little different. I think the timing may be a little rapid.

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