A 2.5 per cent gain in the Nifty 50 in the run-up to the Union Budget (or till date) stands in sharp contrast to the recent past wherein the market has mostly declined one month ahead of the Budget. The gains ahead of the Budget seem to indicate that market is hopeful or optimistic about the watershed event for India Inc on February 1.
And why not? India Inc has been badly bruised by demonetisation and the resultant slowdown in most sectors. Rating agency Crisil’s surveys show automobiles, cement, steel, paper, aluminium and fertilisers had the lowest capacity utilisation – and many of these have been the hardest hit by demonetisation.
“According to the Reserve Bank of India’s OBICUS survey, capacity utilisation in manufacturing was 73 per cent in the quarter ended June 2016, or well below the threshold required to trigger fresh investments. Things haven’t changed materially since. As for the private sector, the appetite to invest is just not there amid high leverage and impaired balance sheets,” it said in a note.
Thus, it’s time to give booster shots. Goldman Sachs’ analysts expect the Budget to be good for most sectors, particularly infrastructure, capital goods and financials. The consensus view is that the government’s key focus would/ should be to revive consumption (hit by demonetisation), especially rural, boosting the spend on infrastructure and promoting growth of medium and small enterprises where employment opportunities have been affected due to demonetisation.
“We think that spending from budgetary resources will be tilted towards boosting consumption, with the rural (MNREGA, roads, housing) and social sector (education, health) being the key focus areas. Central Government spending in both these areas has been scaled back by 0.7-0.8 per cent of GDP each in the past five years. Thus, some revival is now necessary,” said Edelweiss.
Anand Rathi expects increased capital spending on infrastructure, especially on roads, power transmission, defence, low-cost housing and the Railways.
Reviving consumption by way of reducing the tax burden on the common man will lead to an increase in purchasing power (read disposable incomes). Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India, expects an increase in tax exemption limits (including 80C) and home loan interest deductions. This will be positive for sectors such as housing finance companies (especially players focused on affordable housing like Can Fin homes), fast-moving consumer goods, retail and automobiles, according to brokerages.
Boosting infrastructure spending could/ should be by way of spending more on labour intensive sectors such as roads and affordable housing. This would also aid demand for steel and cement players and later on other allied sectors as well. Cement (all companies) will be benefited by both revival in consumption and boost to infrastructure spending. Engineering and construction companies such as Siemens, Larsen and Toubro, Inox Wind, Suzlon, Bharat Electronics and BEML would be the beneficiaries.
Banks and non-banking finance companies could also gain as the government would try to revive the sector with various disposable-income related measures (leading to higher credit growth) besides a greater push for digital payments, leading to cost efficiencies.
However, one will have to watch for any upside risk to inflation from crude prices and a lower and slower cut in interest rates by the Reserve Bank of India. Elara Capital expects the Reserve Bank of India to ease policy rates by 50 basis points in the first half of this calendar year, with 25 bps coming in the monetary policy post Budget.
Very few sectors are expected to be negatively impacted by the Budget announcements. Some of them include quick service restaurants (Jubilant Foodworks, Westlife Development), media and technology, which could be slapped with higher service tax in alignment with the implementation of the goods and services tax.
Like in the past, cigarettes could again come under the net of higher excise duty. Anand Rathi expects an 8-10 per cent increase in excise on cigarettes, necessitating price increases, which would have a bearing on the volumes of cigarette manufacturers such as ITC, Godfrey Philips, VST Industries.
The party for the market and the beneficiaries would continue unless the government decides to tinker with long-term capital gains tax, either in terms of imposition of tax or the holding period.