125000km of road to be upgraded over the next 5 years. This is clearly beneficial for road construction companies prospects.
Budget proposes to allow FPUs to subscribe to listed debt papers of REITs and also allow FPIs and FIIs to invest in debt papers of NBFCs. This can help the NBFCs to attract risk capital to the NBFC sector.
Budget proposes to increase the public shareholding from 25% to 35%. This forces many companies to dilute stake in the market by another 10%. All MNCs and IT companies generally will have to meet the requirement.
Reasonable good focus on Rail Infrastructure improvement and investments expected is to the tune of 50 lac crores over next 11 years.
Labour law improvements are talked about with 4 codes. These could be game changer initiatives.
Electricity and cooking gas for every rural household by 2022, consumer durable sector is the major beneficiary.
All measures till now announced are more populist in nature so spending to go up significantly. Didn’t see any measure till now which could provide revenue boost. Difficult to meet Fiscal deficit target of 3.3% of GDP.
70000crs recapitalisation of PSUs is positive for improving credit situation. This is positive for PSU banks. But no structural measures taken for PSU banks which makes them still structurally weak plays.
1 lac crores 1 time 6 month partial credit guarantee to PSU banks to buy pooled assets to fund NBFCs. This will help some of the NBFC with a rated pool of assets to raise money.This is going to bring some liquidity to NBFC sector. This will be quite beneficial for Auto sector to get the funding back on track.
Government will be doing International Sovereign Borrowing which means will reduce domestic borrowing.
TDS of 2% on withdrawal of over Rs.1cr from bank in a year. This can impact lot of midsized businesses.
Reducing corporate tax to 25% for companies with revenue up to Rs.400crs. This is quite beneficial for small to midsized businesses.
Sectors to invest are Consumer discretionary – Auto & consumer durables, Private banks, beneficiaries of affordable housing, good quality companies which have been forced to increase their public holding to 35%, Industrial engineering companies, Few consumer staple companies who are indirect beneficiaries of increased spending by the government.
Lot of expectations were built before the budget. Market was expecting some of the structural reforms in the budget like 1) Improving the governance in PSU Banks 2) Big push on infrastructure spending 3) Steps to streamline the NBFC issues 4) Rural & SME stimulus. While the budget tried to address many of these issues in some manner, the proposals were probably did not meet market expectations. In addition to that increasing the public shareholding in listed companies to 35%, the increase in direct taxation at the higher income bracket and the increased taxation on Auto fuels have spooked the market sentiment. Since the government came with a strong mandate the expectation of structural reforms, being built in the market was probably on the higher side.
There will be more supply of stocks from the promoters of various companies where the shareholding is above 65%. Since the free float market capitalisation in many companies go up this could in-turn be beneficial to attract more foreign capital to Indian markets. Government borrowing part of their requirements from foreign markets would increase the availability of credit in India and keep interest rates under check. This will benefit most of the Indian corporates. Investors should be focused on the long term growth prospects in various businesses and take this opportunity to invest in good quality companies where issuances may happen because of the changes done to public holding. Budget sets the tone for government actions for the year and increased government spending in many areas provide opportunity to investors.
In order to discourage the practice of avoiding Dividend Distribution Tax (DDT) through buy back of shares by listed companies, it is proposed to provide that listed companies shall also be liable to pay additional tax at 20% in case of buy back of share, as is the case currently for unlisted companies.
Earlier there was a tax differential between buy back and DDT, the arbitrage has been removed. This is not material in nature but puts more tax burden for companies if they want to give out profits to investors.
NBFC Funding related measures can benefit the Auto sector as we may see some pick-up in NBFCs liquidity situation. Traditionally NBFCs were provided funding to auto sector which may come back and therefore pickup in auto demand can happen in coming quarters.
There are many measures which could improve the system liquidity, better credit environment and also lower interest rates which are beneficial to all interest rate sensitive sectors.
Consumption theme may also benefit from government’s focus on welfare schemes. Tax incentive give to electric vehicles and affordable housing can have genuine change in the behaviour of buyers. So sectors which cater to affordable housing theme and also electric vehicles will have good growth impetus.
Increase in excise duty and cess on Petrol & Diesel will have negative impact on user industries and Oil marketing companies (OMC) may not be able to pass on the complete impact very soon.
Lot of measures to boost foreign capital is there in the budget and this means INR appreciation and therefore IT sector and other export oriented sectors may not benefit in the near term.
Winners: Higher FDI limits positive for insurance sector, Increased government spending – indirect beneficiary Consumer discretionary & select consumer staple companies, partial guarantee scheme for NBFC sector to benefit better NBFCs, Sectors linked to affordable housing and water are beneficiaries, Private banks in general are beneficiaries, in general interest rate sensitives could be beneficiaries as bond yields cooling off and system rates are going down.
Losers: OMCs, changes in public holding of companies can impact many companies valuation in various sectors – because of dilution requirements/supply but that can be an opportunity to invest in sound companies as well.
Government is looking at labour reforms, four labour codes are apparently being looked at. This could be a significant change, given how difficult labour reform has been in India over the last 40 years.
Indian economy is very stable and on a growth path. Significant push for private capex growth is not seen in the budget which was the disappointment but some long term and near term measures introduced in the budget can improve the growth in the economy, but with a slow start. Budget will come and go but the inherent strength of our economy still remains and has not changed because of this budget. Investors need to think long term and invest in various asset classes , to my mind Equity as an asset class can provide very good returns in the next 10 years based on the structure of our economy and also taking into account the corporate profitability is at 15 year low, which in my mind could mean revert.
India’s GDP is bound to grow from $2.7 trillion to $8 trillion in next 10 years and government’s push to make India GDP to $5 trillion by 2024 itself shows the road map for the mutual fund industry. Household penetration in mutual funds is very low in India and it is bound to grow manifolds as the per-capita income grows, the absolute GDP goes up then disposable income also has to grow disproportionately. Therefore our outlook on Mutual Fund industry is quite bullish and we see the industry AUM to quadruple in next 10 years.
Pragmatic budget taking into account inclusive growth and development approach. The measures may take time to fructify but some of the measures like labour law changes, attracting structural foreign capital, reducing government holding in companies below 50% can have far reaching impact on the economy & productivity. Housing, water and electricity.
Chief Executive Officer & Chief Investment Officer
(Mutual Fund investments are subject to market risks, read all scheme related documents carefully.)
Oct 20, 2020
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