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Rasheeda Bhagat

Mr Arun Kejriwal, Director, KRIS (Kejriwal Research and Investor Services)

EXTREMELY disappointed with the Finance Minister for hitting the middle classes hard, Mr Arun Kejriwal, Director, KRIS (Kejriwal Research and Investor Services), expects some rollback on dividend tax, a measure that is bound to hit the equity market hard. In this interview to Business Line, he discusses the market outlook and picks PSUs and banks as attractive sectors to invest in.

Excerpts from the interview:

How does the Budget look for the equity market?

There were expectation of a rationalisation of the dividend tax, an issue that has been debated for a number of years. The investor not having to pay a dividend tax was considered a major boost to the equity market two years ago. This being reversed again is negative for capital growth.

Looking ahead and at a horizon of 6 months to two years for the small investor, how does the equity market appear to you in the Budget's aftermath?

In totality and irrespective of the Budget, if you look at an investor who has been holding on to positions for some time before the Budget and plans to do it for a longer time after, there are sectors that have started looking good because of positive decisions made over time. For example, PSU divestment.

Here, because of what happened to a single share like IBP, there is a lot of interest now in the refinery sector. Such stocks as HPCL and BPCL look attractive at current valuations.

They also look attractive because going ahead they can give you a lot of mileage as these two companies will be divested. That will open up a new sector in the country even if one of them goes to a foreigner, Shell, or whoever. The moment a foreigner comes into the country, the competition will change the face of this particular medium of distribution.

What about the banking sector?

The PSU banks, for example, a Bank of India and maybe even a J&K Bank which is not exactly a PSB. They are all available at between 1.8 to 2.2 PE. Except for State Bank of India, the rest are available at PEs of 2. It makes good sense investing in these stocks and holding on for the medium to long term — anywhere between three and 12 months.

What next?

Going forward, he has spoken of the hotel industry, where, unfortunately, we have just 2-3 companies worth talking about. One is Indian Hotels and the other East India Hotels. Both look attractive. Indian Hotels will be hundred next year and investors can expect a bonus within the next 18 months.

What about information technology? Software valuations have come down but the sector is volatile. What is your advice for small investors?

What was the driving force behind technology two years ago? Besides the dotcom fever, etc, this was a sector where people were looking at 100 per cent growth compounded over the last four years consistently and investors felt this was a sunrise and growth industry. For the last six quarters, the growth has fallen to 20-30 per cent. This is not for one or two quarters, so you cannot dismiss it as a flash in the pan. It has happened over five quarters, so maybe the trend has changed. And after September 11 there is clearly a change in the thinking in the US on what the software industry may be able to do in the next two quarters. The turnaround signs that one looks for are certainly not visible today.

So what should small investors do?

To focus on pure IT companies would not be profitable. IT-enabled is the buzz word today and this may do well. The second negative factor for IT is that you have two mega issues lined up. One is from TCS which is likely to be in the region of Rs 3,000-4,000 crore.

Do you think the small investor should go in for the TCS IPO when it comes out?

Oh yes. Looking at valuations it appears profitable. But today to keep money aside for TCS might not be the right strategy because it might take longer. If the market does not recover for any reason, the management might delay the issue.

The other mega issue is i-Flex and these two mega issues combined will be about Rs 5,000 crore. This would be a big sum of money. Considering that the foreigners are putting in about Rs 1,200-1,300 crore in a month, this could be big dampener on the IT sector when the issue is actually announced.

Now that interest rates are falling, what kind of realistic returns can investors expect from the equity market? Also we have to remember that dividends will be taxed in their hands.

I believe that with the kind of hullabaloo being made by the industry and others, there will have to be some kind of review on dividend tax. This is certainly a retrograde or derogatory step — there are no words to describe it. Nowhere in the word are such things done. Not only has the purse of the investor and the lower middle income group been made virtually useless, they also lose out on Section 88, on dividend, they pay a 5 per cent surcharge and suffer from the reduced subsidy on LPG and kerosene. So the difference between the farmer and the educated middle-class has now become too huge.

So you expect some kind of a rollback on the dividend tax?

Yes. Also with the furore over kerosene and LPG, if nothing is done on the dividend tax too, it would be gross injustice. Whatever progress the capital market has made in the last two years after rationalisation, abolition of badla and rolling settlement, etc, will be lost in the next couple of months because there will be no incentive to subscribe to IPOs or save. India has always been very resilient as it has a high savings rate — 26-27 per cent of GDP — but now we will also start going the American way and say: `Might as well spend it, why save?' The entire Indian fabric, where parents take it upon themselves to establish the children, will be affected. I think none of us — the government or society — has the right to change this.

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