Economic Times: October, 2016
In an exclusive interview with ET Now’s Tanvir Gill , Mark Mobius , Executive Chairman, Templeton EM, says GST is unlikely to be fully implemented before end of next year. Edited excerpts
The GST council has proposed a structure of levying cess on ultra-luxury and sin goods by GST, a departure from original GST concept. The sound bites that you are getting as of now, do they convince you that they could perhaps 11th hour 59th minute make it?
No I do not think that is possible because there are so many different forces at work that you cannot expect a clean immediate implementation of this system.
So what would be a reasonable time line according to you?
I think the end of next year.
End of next year?
So it gets pushed back by eight-nine months?
For complete implementation. In the mean time, there will be incremental changes taking place which will be very beneficial. But to be realistic, we have to take longer term in consideration. I would be happy to be surprised. It will be wonderful if they are able to do it before that but I think it will be a little longer than we expect.
The reason I ask you this is because you had told me that with GST passage, you would look at doubling your India investments. Even in your last interview with me about a month back, you said that your India allocation was stand at 7.5-8%, the EM fund can go up to 14%, even 20% plus. So when would you start increasing your allocation? What would you want to see to make that decision?
A lot of it will depend on what happens to pricing of the securities. When I say that I do not mean just this absolute stock price but also the earnings. If earnings surge, then we can justify doubling, tripling our allocation and; of course, when we talk about GST, we talk about what impact that has on the earnings of the companies. We have to be flexible and look at each company on an individual basis and determine what they are going to be and what impact the GST is going to have on those earnings. In some cases, it will be as much as 10% increase in earnings and that can be very significant.
Yes I want to talk about that because even S&P has put out a note that if GST goes through as per plan, then India’s potential of 8% plus would very much come to the fore. Do you agree with that?
Absolutely. I agree yes, full implementation. This is very important.
Full implementation. So, that you only foresee coming through from FY19 onwards?
What would that do for corporate earnings because you are foreseeing 12% to 15% earnings growth for FY17? With GST coming into place, how much of that could get revised higher? Where would the earnings range move up to?
There will be an incredible increase in earnings for many companies. As much as 20% in some cases. But I have to emphasise that with the GST, you now have a bigger market for many companies. So you are going to have consolidation of firms throughout the country and you are going to have the growth of huge conglomerates, huge companies that are world class and will be able to expand internationally at a much faster pace.
So it is very important to emphasise that the consumer market in India is enormous but it is now divided. It is segmented. With the GST, you will see a combining of these forces so that you then have the rise of really huge consumer product companies, consumer service companies, etc. It can be very exciting.
So give me a range anatomy, how high could earnings growth go up by?
In the next three or four years, you can see 20-30-40% increase in earnings with the proper GST implementation.
And again a derivative of that would be what that does for market valuations. Again you highlighted and I was quite startled when you said 20-25 times PE expansion, valuation expansion is very much on the cards. We are at about 17 times. One year forward, that would mean a 50% strong rally from here. A 41,000 target for the Sensex, 13,000 for the Nifty. Do all of that really rest on GST? What else can really take the market higher?
There are combinations of factors here. There is GST but there is also interest rates. With very benign inflation, you are going to see lower interest rates which means that you can justify higher PEs. So there are combination of things. There is GST impact on earnings growth, lower interest rates, cost of capital coming down -- all of these things combining to give an incredible push to stock prices.
How soon do you think we would embark on that mighty rally? We are pretty much still trying to tease around the all-time highs. When do we go pass that?
I think middle of next year probably because by that time the GST impact will really begin to feed into the system if everything goes the way they are expected to go.
So by August next year, we would be at 13,000 index on the Nifty?
It is quite possible.
Just want to talk about whether this outperformance in India which largely seems like driven by domestic fundamentals improving, can happen in isolation to the rest of the emerging market world?
It can because look at China. China has surged ahead far faster than every other emerging market except India and India now could become a leader. It could really drive the growth of other markets because the other thing that is happening is that as India opens, they will begin to see the impact of trade and investment into other markets around the world particularly emerging markets. Already that is happening but I think it will happen to a great extent going forward.