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Budget 2022-23
Decoded

Government preferred investment led growth over consumption

img February 02, 2022

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Government preferred investment led growth over consumption

img February 02, 2022

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Budget Analysis 2022-23

Growth oriented budget, primarily focused on capex, no near-term triggers for revival of consumption
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).

Budget Analysis 2022-23

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.

Budget Analysis 2022-23

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.

What will be our investment strategy now?

  • We have always believed that budget speech has usually short-term impact on markets. After initial reaction for budget day or at most 1 or 2 days after budget, the market comes back to fundamentals. Q3FY22 earnings season is underway. Pressure on margins for corporates is clearly visible despite price hikes undertaken by many of them in past quarter. This has implications for full year EPS estimates for FY22E to FY24E.
  • Post this budget, we can conclude economy facing sectors like infra/capital goods, roads, ports, cement, construction etc may witness uptick. In our note "Outlook 2022" released by us in December 2021, we had mentioned this theme & these sectors as preferred sectors to play for next few months. We remain bullish on Capital goods stocks like L&T, ABB Power, Hitachi Energy & cement stocks like Shree Cement, ACC, Dalmia Bharat etc.
  • Digitalization, Clean Technology/Green Energy, Alternate Fuels, Electric Mobility remain other important themes to play in CY22
  • Banks have shown remarkable improvement in their performance in Q3FY22. We expect investors to rotate some investments out of IT/metals to Banks in near term. We are bullish on private sector banks & large NBFC like HDFC bank, ICICI Bank, Bajaj Finance, Chola Investment Finance etc

Detailed analysis of budget FY23 provisions on specific sectors & our preferred picks are given in following pages

Sector Analysis:

Infrastructure
Defense
Housing & Urban Development
EV & Clean Energy
Chemicals
Banks & Financials
Healthcare
Education & Skill Development
MSMEs
Agriculture

Sector Analysis - Infrastructure

  • The government announced modest increase in allocations to various schemes and departments of Infrastructure;
  • Budget for roads was increased by 2% YoY (RE) with total outlay at Rs 20,000 crores. Target is to expand highways by 25,000 km in next financial year (including NHAI).
  • Railways saw 17% YoY (RE) increase in allocation and stood at ~Rs 14,000 crores. 2000 km of network and Four hundred new-generation Vande Bharat Trains with better energy efficiency and passenger riding experience will be developed and manufactured during the next three years.
  • Ken-Betwa river link (in states of UP/MP) to be executed for Rs 44,000 crores " (Rs. 1,400 crores allocated in FY23BE vs Rs. 4,300 crores in FY22RE). This is aimed at providing irrigation benefits to 9.08 lakh hectare of farmers" lands, drinking water supply for 62 lakh people, 103 MW of Hydro, and 27 MW of solar power.
  • Spectrum auctions will be conducted in 2022 to facilitate rollout of 5G mobile services within 2022-23 by private telecom providers.
  • The contracts for laying optical fiber in all villages, including remote areas, will be awarded under the Bharatnet project through PPP in 2022-23.

Our preferred stocks: Bharti Airtel, Reliance Industries (Reliance jio), Larsen & Tubro, ABB Power, Hitachi Energy, Titagarh Wagons, Astral.

Sector Analysis - Defense

  • The Government is committed to reduce imports and promote Atma-Nirbharta in equipment for the Armed Forces.
  • 68% of the capital procurement budget will be earmarked for domestic industry in FY23, up from 58% in FY22.
  • Defense R&D will be opened up for industry, startups and academia with 25% of defense R&D budget earmarked.
  • Private industry will be encouraged to take up design and development of military platforms and equipment in collaboration with DRDO and other organizations through SPV model.
  • In FY23, the allocation to Ministry of Defense is Rs. 5,25,166 crores vs. Rs. 4,78,196 crores in FY22.

Our preferred stocks: Bharat Electronics, Data Patterns, MTAR Technologies.

Sector Analysis - Housing & Urban Development

  • In FY23, 80 lakh houses would be built for the PM Awas Yojana's identified eligible beneficiaries and a total of Rs. 48,000 crore has been set aside for this purpose.
  • Allocation of Rs. 60,000 crores (Rs. 45,011 crores in 2021-22 RE) has been made under Jal Jeevan Mission with an aim to cover 3.8 crore households in FY23.
  • A high-level committee of reputed urban planners, urban economists and institutions will be formed to make recommendations on urban sector policies, capacity building, planning, implementation and governance.
  • Five existing academic institutions for urban planning to be designated as Centre for Excellence with endowment fund of Rs. 250 crores each.
  • For urban capacity building, support will be provided to the states. Modernization of building byelaws, Town Planning Schemes (TPS), and Transit Oriented Development (TOD) will be implemented. This will facilitate reforms for people to live and work closer to mass transit systems.

Our preferred stocks : Godrej Properties, Ashiana Housing, Kajaria Ceramics, Astral, Finolex Industries.

Sector Analysis - EV & Clean Energy

  • Battery swapping policy to allow EV charging stations for automobiles will be framed.
  • Private sector will be encouraged to create sustainable and innovative business models for battery and energy as a service, improving the efficiency in the EV ecosystem.
  • Energy efficiency and saving measures will be promoted.
  • FM announces Rs 19,500 crore allocation in PLI for solar modules.
  • The battery swapping policy is a positive measure for electric vehicles (EVs) which will give a boost to the sector and lend to the clean energy segment & faster adoption of electrical vehicles.

Our preferred stocks: Tata Power, Exide Industries, Amara Raja Batteries, Auto OEMS focused on EV like Tata Motors, Sona Comstar etc.

Sector Analysis - Chemicals

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.

Existing Scenario Outcome Impact
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.

Sector Analysis - Banks & Financials

  • Government has proposed to set up 75 Digital Banking Units (DBUs) in 75 districts of the country by Scheduled Commercial Banks so that benefits of digital banking reach every nook and corner of the country in a consumer-friendly manner.
  • Introduction of Central Bank Digital Currency- proposed to issue digital rupee using blockchain technology in FY 2022-23.
  • Digital Banking by Post Offices: 100% of post offices to come on the core banking system

Our preferred stocks: HDFC Bank, ICICI Bank, Bajaj Finance, Chola Investment.

Sector Analysis - Healthcare

  • The National Digital Health Ecosystem will be rolled out. It will consist of digital registries of health providers and health facilities, unique health identity, consent framework, and universal access to health facilities.
  • A "National Tele Mental Health Programme" will be launched which will include a network of 23 tele-mental health centers, with NIMHANS being the nodal center and International Institute of Information Technology-Bangalore providing technology support.
  • Mission Shakti, Mission Vatsalya, Saksham Anganwadi and Poshan 2.0 were launched to provide integrated benefits to women and children.
  • Two lakh Anganwadis to be upgraded to Saksham Anganwadis.
  • Total allocation to the National Health Mission is increased from Rs. 34,947 crores in 2021-22 RE to 37,800 crores 2022-23 BE.
Outlay in 2022-23

Sector Analysis - Education & Skill Development

  • "One class, one TV channel" program of PM eVIDYA will be expanded from 12 to 200 channels.
  • High-quality e-content in all spoken languages will be developed for delivery via internet, mobile phones, TV and radio.
  • A Digital University will be established with world class quality universal education. The University will be on a networked hub-spoke model, with the hub building cutting edge ICT expertise. built
  • Digital Ecosystem for Skilling and Livelihood (DESH-Stack e-portal) will be launched to promote online training. t will also provide API-based trusted skill credentials, payment and discovery layers to find relevant jobs and entrepreneurial opportunities.
  • Startups will be promoted to facilitate Drone Shakti for Drone-As-A-Service
  • In FY23 (2022-23 BE), the allocation to National Education Mission is Rs. 39,553 crores vs. Rs. 30,796 crores in 2021-22 RE.

Sector Analysis - MSMEs

  • Udyam, e-Shram, NCS and ASEEM portals will be interlinked. Their scope will be widened. The platform will provide G2C, B2C, and B2B services.
  • The ECLGS will be extended up to March 2023 and its guarantee cover will be expanded by Rs. 50,000 crores to total cover of Rs. 5 lakh crores, with the additional amount being earmarked exclusively for the hospitality and related enterprises.
  • Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE) scheme will be revamped with required infusion of funds which will facilitate additional credit of Rs. 2 lakh crores.
  • Raising and Accelerating MSME Performance (RAMP) programme with outlay of Rs. 6,000 crores over 5 years will be rolled out. This will help the MSME sector become more resilient, competitive and efficient.
  • Certain Anti- dumping and CVD on stainless steel and coated steel flat products, bars of alloy steel and high-speed steel are being revoked.

Sector Analysis - Agriculture

  • Government to promote funds for blended finance (government share limited to 20%) for sunrise opportunities such as climate action, agri-tech, etc.
  • Fund to be facilitated through NABARD to finance startups for agriculture and rural enterprise, relevant for farm produce value chain. Startups will support FPOs and provide tech to farmers.
  • Use of Kisan Drones to be promoted for crop assessment, digitization of land records, spraying of insecticides and nutrients.
  • Procurement of wheat in Rabi season 2021-22 and the estimated procurement of paddy in Kharif season 2021-22 will give cover 1,208 lakh metric tones of wheat & paddy from 163 lakh farmers with Rs. 2.37 lakh crore will be the direct payment of MSP value to their accounts.
  • Delivery of hi-tech services for farmers to be launched.
  • MSP for farmers to be transferred directly into bank accounts.
  • Chemical-free natural farming to be promoted in India.

Sector Analysis - Others

  • Ease of Doing Business 2.0: 1) 25,000+ compliances were reduced and 1,486 Union laws were repealed. 2) Integration of central and state level systems through IT bridges. 3) Support to 5G under PLI scheme.
  • Ease of Living: 1) Modernization of building byelaws, implementing Town Planning Schemes and Transit Oriented Development. 2) Issuance of chip embedded ePassports. ePassports will be rolled out in FY23 for convenience in overseas travel 3) Establishing Centers of Excellence in urban planning.
  • Exports: 1) To incentivize exports, exemptions are being provided on embellishment, trimming, fasteners, buttons, zipper, lining material, specified leather, furniture fittings and packaging boxes. 2) Duty is being reduced on certain inputs required for shrimp aquaculture so as to promote its exports.
  • Solar Power: Additional Rs. 19,500 crores for PLI to manufacture high efficient modules.
  • Electronics: Customs duty rates are being calibrated to provide a graded rate structure to facilitate domestic electronics manufacturing. The government to allocate Rs. 5,300 crores to large scale electronics and IT hardware under PLI scheme in FY23 BE.
  • Gems and Jewelry: Customs duty on cut and polished diamonds and gemstones is being reduced to 5 %.

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