Markets are expected to move within a range in the short term on the back of worsening global macros arising out of geopolitical uncertainties and recessionary fears, says Vinay Jain, Portfolio Manager at Karma Capital.
Having spent more than 11 years in equity research and portfolio management, he sees domestic-focussed sectors perform relatively better than those with global exposure.
Banks, capital goods, engineering, industrials, and consumption-driven companies should get a huge fillip from the budget and deliver strong earnings performance while earnings for sectors like technology and commodities are expected to be relatively weaker, says the Portfolio Manager of the Karma India AIF.
What is your rating for the Budget on a scale of 1-10 or is it beyond 10?
The Union Budget 2023-24 was a fine balancing act by the Finance Minister. Sticking to the path of fiscal consolidation, the budget is targeting gross fiscal deficit (GFD) of 5.9 percent for FY24 against 6.4 percent in FY23, while maintaining a capex push and giving tax sops to the middle class to support consumption. The medium-term target for fiscal consolidation is also maintained at 4.5 percent by FY26 which reinforces commitment to fiscal prudence. We believe it is a highly pragmatic and growth-oriented budget.
Do you think the government has delivered on all counts in the Budget?
We do believe that the government has delivered on all counts of capex, consumption and credit. The budget has carried forward the government's focus on the bottom end of pyramid with free food grains and enhanced allocations for development of tribal and backward sections & regions; taxation relief to the middle class; enhancing agri-credit and farm level subsidies; focus on green energy & energy transition and higher capex spend with Rs 13.7 lakh crore capex.
The government has stuck to its fiscal consolidation target in FY24 in an environment of high inflation and global geopolitical crisis. We believe that the budget is targeting inclusive growth with focus on increasing consumption through benefits to the middle class and providing impetus to the industry to spur investment for domestic manufacturing and infrastructure development.
What is the most surprising factor in the Budget? Have you spotted any negative things in the Budget?
The most surprising factor in the budget was the 33 percent growth in capital expenditure. This has a multiplier effect on the economy with rural job creation for construction workers. The government has done well to resist the temptation to be populist in a pre-election year. It also announced an Rs 35,000 crore capital subsidy for energy transition including battery storage which is a positive announcement.
Lack of any visible support to rural areas is a sentimental negative for staples and other rural stocks. A small negative for very high-end property transactions (> Rs 10 crore) wherein the government has capped the benefit of capital-gains tax offset. Also, distribution of REIT surpluses via the return of debt capital route will now be taxed in the hand of the unit holder. This is a potential negative for REITs. Lastly, the government's proposal to tax proceeds from life insurance (ex-ULIPs) if total premium is >Rs 5 lakh is negative for life insurers as it dilutes returns on top selling products.
Your thoughts on the big capex outlay of Rs 10 lakh crore? Do you think the private sector capex is lagging by a wide margin?
Over the last few years, India has been witnessing a transition towards an economic stronghold stimulated by the national infrastructure pipeline comprising key initiatives like ‘housing for all’, smart cities, ‘Bharatmala’, ‘Sagarmala’, ‘Udaan’ (airports), freight corridors, high-speed rail and metro rail, among others. The capex outlay of Rs 10 lakh crore reaffirms our view on the government's continued focus on infrastructure development to provide impetus on economic growth. This big capex push from the government comes at a crucial time when private sector demand might start seeing a slowdown in the coming year amid a faltering export and rising cost of capital.
Do you expect the market to see more structural run in coming months or do you think most of the positives are fully priced in?
It is difficult to predict markets and hence, rather than forecasting where the markets are headed in the next 3-6 months, we have a more medium to long term view on the same. However, long term growth prospects for India look significantly better than most developed economies.
We feel that markets are expected to be rangebound in the short term on the back of worsening global macros rising from geopolitical-led uncertainties and recessionary fears. At Karma, we follow a disciplined bottom-up fundamental approach to identify opportunities with growth potential that are available at reasonable valuations. We feel that there are ample opportunities which offer favorable risk-reward at current levels.
What are the sectors to bet on a post healthy Budget?
We at Karma Capital see domestic-focused sectors to perform relatively better than those having global exposure. Banks, capital goods, engineering, industrials, and consumption-driven companies should get a huge fillip from the budget and deliver strong earnings performance while earnings for sectors like technology and commodities are expected to be relatively weaker.
Are you bullish on the railway space?
The capex outlay for Railways at Rs 2.4 lakh crore saw a huge boost with more than 50 percent increase versus Revised Estimates for FY23 and 9x the outlay made in FY14. For FY23 as well, the Revised Estimates were 16 percent higher than the Budgeted Estimates. Indian Railways has prepared a National Rail Plan (NRP) for India - 2030 which envisages to create a “Future Ready” Railway system. The NRP is aimed to formulate strategies based on both operational capacities and commercial policy initiatives to increase modal share of the Railways in freight to 45 percent.
The objective of the Plan is to create capacity ahead of demand by 2030. As part of this Plan, Vision 2024 has been launched for accelerated implementation of certain critical projects by 2024 such as 100 percent electrification, multi-tracking of congested routes, upgradation of speed to 160 kmph on certain routes, upgradation of speed to 130 kmph on all other Golden quadrilateral – Golden Diagonal routes and elimination of all Level Crossings on such routes.
While new sections are being progressively commissioned for traffic in the Eastern and Western Dedicated Freight Corridors, new Dedicated Freight Corridors have been identified and expansion of rail networks in Jammu and Kashmir and the Northeastern region of the country is being emphasized.
Many new improvements, such as self-designed Vande Bharat Express, Tejas Express, Vistadome Coaches, new Signaling Systems, Long Haul Freight Trains, High Capacity and High Speed wagons, Kisan Rail, Solar powered passenger coaches etc have been undertaken to bring about sea change in customer comforts and expectations. Innovative improvements are also being brought upon by assimilating new technologies in the form of SMART Coaches, SMART Locomotives, SMART Yards, Automated Train Examination System, Automatic Train Protection, Centralized Traffic Control and Train Management System etc.
Indian Railways is considered the country’s lifeline for transporting passengers as well as cargo. To remain competitive vis-à-vis other transportation modes and to provide optimum level of service to passengers and for freight, Indian Railway is investing in railway infrastructure to augment capacity, expand the network and make it more efficient and customer-centric.
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