Growth oriented budget, primarily focused on capex, no near-term triggers for revival
Union Budget 2022-23 is overall well-balanced growth-oriented budget with clear focus on capex primarily funded through public funds. Emphasis on tech-enabled development, digitization to enhance productivity, support to Sunrise industry, energy transition etc signal country's firm & steady progress towards New India which is ready to make its mark on global arena in fast changing environment. Significant increase of 35% in Capital expenditure (capex) imply the government's belief in economic recovery (post pandemic) through public investment & spending. Large part of incremental Capex is planned for building infrastructure like roads/highways/railways/telecommunications which will provide long term sustained growth to the country. About Rs 1 lakh cr has been earmarked for transfer to states to enable them to undertake infra projects. In our opinion such direct help to states will expedite execution of various infra projects & will results in immense benefits like employment generation & creation of demand for various products like steel, cement etc. We believe 35% increase in Capex shall help all economy facing sectors. We have been bullish on Capex/economy related sectors like power, cement, steel, equipment manufacturers, industrial automation etc since last few months & we expect the budget to continue to provide support to these sectors.
The extension of ECLGS (Emergency Credit Line Guarantee Scheme) by 1 more year & additional allocation of Rs 50 thousand cr will benefit MSME (Medium & small enterprises) in a big way. Many of the MSME were severely impacted by Covid induced lockdown & disruptions. Any kind of financial assistance will help them in recovery which in the long term is beneficial to organized sector in turn to equity markets since most of these MSMEs are ultimately users of products/services produced by organized sector. Hence in our view health of MSME sector is crucial for country's overall growth & positive for equity markets. Support to MSME will benefit many mid & small cap listed companies also which means positive for broader markets.
New age technology enabled companies/Startups have played a crucial role in bringing capital into the country in last one year. We expect this trend to continue in future too. Government has recognised importance of Startups in growth of the country. Although no major announcement was made in regards to Startups but the intention to set up a committee to look into measures to help & build a robust ecosystem for Startups is positive step in that direction. Focus on creating tech enabled environment & engaging Startups in almost all government programs for development will help many newly setup ventures (some in the listed space too).
Emphasis on Solar power, creating entire value chain from photo voltaic chips to last mile availability of clean power & announcement regarding Battery Swapping policy for electric vehicles imply not only our resolve to climate consciousness but will generate many opportunities in renewable space for lot of companies. In our note "Outlook for 2022" we had mentioned "Clean Energy & alternate fuels" as an important emerging theme for investments in CY2022. The Budget proposals are in line with that expectation. We can play this theme through listed players like Reliance, MTAR, Tata Power, Borosil Renewable, Exide, Amara Raja Batteries etc.
Introduction of RBI backed digital currency is a testimony to India's preparedness to lead the world in new age on back of its globally recognized IT capabilities. The impact of Digital currency on overall economy is not known yet & needs more in-depth studies. However, it does imply the immense opportunities new technologies like blockchain can open for the country.
Tax on digital Assets will help in tracing huge amount of transactions in this space, it will also bring some accountability for all stake holders. Initially there may be significant reduction in transactions in Crypto world, but we believe such regulations are necessary for long term development of any asset class. It may be "near term pain long term gain" for digital assets. Recognition of animation, visual effects, gaming, and comic (AVGC) sector can be potential employment opportunity for youth.
Increasing use of IT & telecom infrastructure for providing financial inclusion through post offices, education to remote areas through eVidya & ease of living through ePassports & other initiatives to enhance productivity will open many new areas of activity for IT companies. We believe Digitization will be a key theme to play in markets in CY2022 which can be played through large & mid cap listed IT/Analytics/ITES companies.
A few places where the budget did not meet expectations
Gross borrowings of Rs 15 lakh cr is much higher than expectations. Due to higher net borrowings compared to previous year in environment of global liquidity tightening, the treasury yields are likely to harden. RBI may be forced to take tough stance & increase interest rates at faster & higher pace which may result in inflationary pressures. Higher yields lead to loss of treasury gains for banks hence higher inflation will be negative for BFSI sector.
There is no direct measure to revive consumption especially in rural economy. Consumption has slowed in last 2 years like other sectors however economic recovery witnessed recently has shown that consumption has not yet come back to pre-covid levels. Inflation is enemy of consumption. Double whammy of higher inflation & no stimulus for growth is negative for FMCG & other related sectors especially those focused on rural India.
Government has budgeted Rs 65000 cr from disinvestment in FY22-23. This imply that some of the large ticket disinvestment announced in previous years (BPCL, LIC, IDBI, SCI etc) may not go through. In last many years government has been failing in achieving disinvestment target by significant margin. Some people believe this time government may have been more pragmatic & realistic in assumption. However, we believe lower disinvestment target could have been the reason for higher fiscal deficit & higher borrowings.
Market participants were expecting some measures on inclusion of Indian treasury bonds into global bond indices. However, that required some tax related modifications which have not been announced implying delay in inclusion of Indian bonds in global indices.
While headline announcements talk of 35% increase in Capex but it is 9% increase over revised estimates of FY22. Capex benefits will accrue in longer term not immediate term. Markets were expecting some measures to revive consumption & revive overall economy.
Conclusion: A) No negative news is positive for markets; B)the budget clearly spells the government's preference for investment led growth over consumption led.
Overall, the budget can be termed as growth oriented with inflationary bias & with no near-term triggers for equity markets. However, capex / investments in infrastructure will surely pave way for long term sustained growth for Indian economy.
Detailed analysis of budget FY23 provisions on specific sectors & our preferred picks are given in following pages
Our preferred stocks: Bharti Airtel, Reliance Industries (Reliance jio), Larsen & Tubro, ABB Power, Hitachi Energy, Titagarh Wagons, Astral.
Our preferred stocks: Bharat Electronics, Data Patterns, MTAR Technologies.
Our preferred stocks : Godrej Properties, Ashiana Housing, Kajaria Ceramics, Astral, Finolex Industries.
Our preferred stocks: Tata Power, Exide Industries, Amara Raja Batteries, Auto OEMS focused on EV like Tata Motors, Sona Comstar etc.
Customs duty on certain critical chemicals namely methanol, acetic acid and heavy feed stocks for petroleum refining being reduced; Duty is being raised on sodium cyanide for which adequate domestic capacity exists - This will help in enhancing domestic value addition.
|Custom Duty "Methanol" 10%||Custom Duty "Methanol" 2.5%||Since it is mostly imported into India, provision will be broadly beneficial to many companies like Navin fluoro, Gujarat fluoro, Balaji Amines etc|
|Custom Duty "Acetic acid" 10%||Custom Duty "Acetic acid" 5%||Negative for Indian producers like GSFC, while positive for importers|
|Custom Duty "sodium cyanide" 7.5%||Custom Duty "sodium cyanide" 10%||Negative for Indian producers|
Our preferred stocks: Tata Power, Exide Industries, Amara Raja Batteries, Auto OEMS focused on EV like Tata Motors, Sona Comstar etc.
Our preferred stocks: HDFC Bank, ICICI Bank, Bajaj Finance, Chola Investment.
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