Budget 2022: Sectors linked to investment economy to fare well, says Ashish Shanker of Motilal Oswal Private Wealth

Excerpts from the interview:

Where do you see the Nifty50 at the end of January?

It is impossible to take a short-term view as markets will be dominated by events such as state elections and global news flow. However, corporate earnings trajectory looks promising every quarter. The expected EPS for Nifty50 for FY23 is 873, which is 20 percent growth over the estimate of 730 for FY22.

Therefore, in the near term, downside is limited and the upside looks quite strong over the next couple of years.

Which sectors do you think will benefit most from the Budget?

Government revenues and corporate balance sheets are the strongest we have seen in a decade, and demand looks robust. Hence, we believe it is inevitable that we will see investments in infrastructure and capacities in the next year or so. Real estate prices and affordability at the household level are the best in decades, which will drive volumes in this sector. We believe the government will build on policy initiatives linked to investment side of the economy and manufacturing, which will give a further boost to such companies.

Also read: CEOs expect 9-10 percent growth in current fiscal: CII poll

Do you expect more sops for the housing sector?

The government will try to build further on housing demand, and there are expectations of further sops for first-time home buyers. The Centre could move in the direction of making personal income tax easier in terms of heads and filing.

Then which sectors and stocks should one look at right now?

Corporate earnings in Q2FY22 were largely led by (1) cyclical sectors such as metals and oil and gas, (2) improved asset quality in financials, and (3) strong topline growth in the technology.

Management commentaries across the board suggest an improved demand environment. Hence, we believe sectors linked to the investment economy will fare well. Sectors like IT services and digital platform businesses will see exponential growth as well.

From a long-term perspective, we remain positive on sectors such as financials, IT, consumers, while cyclicals such as metals, cement and capital goods would continue to remain beneficiaries of government capex.

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What about healthcare? Will it continue to remain in focus, especially now that the Omicron variant poses a new threat?

Even in the previous Budget, health and wellbeing was a key focus area, and we believe this trend will continue.

In terms of investment opportunities, within the domestic branded generics space, marketing activities for most companies have normalised to pre-COVID levels. Acute therapies continue to see high sales growth on a lower base of last year, while chronic therapies continue to see secular growth. Overall profitability for most domestic-centred companies is expected to improve.

There could be select opportunities in API/CRAMS, hospitals and diagnostics.

How do you see the banking space, especially with the formation of the NARCL?

Some of the corporate banks that bore the brunt of the previous NPA cycle have cleaned up their balance sheets and increased retail focus. We believe they will do well and get re-rated.

Also read: Budget 2022 | Levels of fiscal consolidation key for foreign investors, says Emkay Wealth’s Joseph Thomas

The Centre is also weighing changes in the cryptocurrency space, which has gained immense popularity in the past two years in India. How will a crypto tax impact the money that has been flowing into the space?

The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, introduced in Parliament’s Winter Session seeks to create a facilitative framework for the creation of the official digital currency to be issued by the RBI. The Bill seeks to prohibit all private cryptocurrencies in India, however it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses.

Any money that flows into this space is ‘high risk-reward seeking’. Hence, any adverse impact on this category on account of either regulations or tax could move some of these flows to equity markets.

Do you think investors will get a reprieve in terms of a higher exemption limit from tax on capital gains?

AMFI has proposed for uniformity of taxation on Listed Debt Securities and Debt Mutual Funds.

The proposal requests either to (1) reduce the period for qualification of long term in Debt Mutual Funds from the more than 3 years now to more than 12 months, or (2) increase the minimum holding period for direct investments in listed debt securities/and zero coupon bonds (listed or unlisted) to 36 months to qualify as Long Term Capital Asset.

There are also requests for uniform tax treatment on capital gains from equity mutual fund investments and ULIPs of insurance companies.

Also read: Budget 2022 | Key terms you should know before the Budget is announced

FIIs have largely been sellers in 2021. Do you see the trend reversing?

With the US Fed focusing more on CPI inflation, and also doubling the taper to $30 billion per month, the US treasury yields are likely to inch upwards going forward. Hence, the trend may not change immediately. However, DIIs have more than compensated for FII outflows during this calendar year. In CY20, till the end of November, overall net FII inflows stood at $5.3 billion, while DII inflows were $8.1 billion. Over a period of time, India should see positive FII inflows, given the strong domestic macros and robust earnings growth outlook.

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