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Daily Voice | With likely capex of Rs 9 lakh crore in Budget 2023, this investment adviser is upbeat on 5 sectors

Union Budget 2023: Sagar Lele, WealthBasket Curator & Founder of Rupeeting, is also positive on the cement space and says the sector has enough tailwinds to outperform in 2023

February 01, 2023 / 10:23 AM IST
Sagar Lele, the Founder of Rupeeting

Sagar Lele, the Founder of Rupeeting

Sagar Lele, the WealthBasket Curator and founder of Rupeeting, doesn’t expect the Budget 2023 to bring in a systemic change in the market direction but he does see an upside in some pockets.

The Sebi registered investment adviser, who has spent more than a decade in equity markets, says with a likely capex target of more than Rs 9 lakh crore, FY24 could be good for cement, construction, engineering, infrastructure, and rail sectors.

He tells Moneycontrol in an interview that defence is likely to continue seeing higher spend and is also upbeat on the cement space. Edited excerpts:

Do you think the Federal Reserve and the European Central Bank will be done with rate hikes after upcoming policy meetings?

Although the quantum of rate hikes has reduced, it is too soon to call out a pivot in central bank policy. There can be a reduction in the degree and pace of hikes but we don't see a case for hikes to stop at least till the middle of 2023.

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Inflation in the US did show signs of slowing down but at 6.5 percent, it is far from comfortable. On top of that, GDP numbers and job additions continue to be strong. These are not signs that would make the Fed change its stance just yet.

Economically, the Eurozone hasn't been showing as much resilience. Forward-looking indicators do point to contraction in the economy, and the PMI has been below 50. But then, November inflation despite moderation, was at 9.2 percent, which is extremely high.

Moderating inflation and slowing growth are enough to slow hikes down. But inflation at acceptable levels, possibly fueled by contracting economies is necessary for a reversal in policy. Hikes are expected to continue till the middle of the year, with a reversal possibly in the second half of 2023.

Do you expect the consolidation to continue in Indian markets till the end of FY23? Do you see any possibility of the current calendar year ending with 10-15 percent returns?

A 10-15 percent return for the year seems like a stretch. Too much must go right to be able to end the year with double-digit returns on the markets. Any faltering of sentiment or liquidity can end up acting negatively, and sadly, there is a high risk of both.

We aren’t too worried about a recession in the West impacting the Indian markets. After all, exports form just about 13 percent of the GDP. Moreover, there are several tailwinds—controlled inflation, strong domestic demand, the government’s focus on capex and manufacturing, robust consumption, expansionary fiscal policy, and possibly a reversal in monetary policy too.

But, here’s the deal. At 21x FY23 earnings, we are already trading above long-term averages. Valuations can sustain with high growth but further re-rating looks tough. And on earnings, we are already expecting a 10 percent growth for FY23 and 15 percent for FY24.

Also, relative to other emerging markets, India is trading at an 80 percent premium. Global investors do get better upside on China with a potential upgrade in earnings at inexpensive valuations. The supremely high relative valuations can lead to underperformance for India.

Net, just like 2022, we see wild swings in both directions but overall, there’s a good chance that by the end of the year, we land up just where we started.

What were the key challenges (on global as well as domestic fronts) for the finance minister while making the Budget 2023?

The ability to capitalise on opportunities while being constrained by either capital or by choice is going to be the key challenge this budget.

While a third of the globe is on the brink of a recession, India has emerged at the top of the leaderboard on growth. Maintaining the highest relative growth on the global stage would need continued focus on infrastructure.

The budget would hence need to take a bet on higher capex, instead of succumbing to a populist skew. But higher capex would also mean tighter navigation on the deficit, which again leaves little room for people-pleasing.

The key challenge hence would be to maintain the ethos of structural change and degree of aggressive spending at the risk of implementing traditionally popular formulas designed for full-year budgets just before an election year.

Do you expect any major announcements in the Union Budget 2023 that can change the market direction significantly?

We don't expect the budget to cause a systemic change in the direction of the markets. Instead, it would spur upside in certain pockets.

With a strong possibility of a capex target of more than Rs 9 lakh crore, this could be a good year for the sectors of cement, construction, engineering, infrastructure, and rail.

Defence is likely to continue seeing tailwinds in the form of higher spend, emphasis on indigenisation and even a boost in export orders.

There could be continued focus to improve the state of SoEs (state-owned enterprises). We are betting on public sector banks as the focus on consolidation, steps towards operational improvement and strength in the credit cycle all act in favour of the sector.

Additionally, steps taken to boost manufacturing in India, or structural changes to aid divestments will also make a difference in clots rather than on the full stream.

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Do you expect the Finance Minister to tweak tax rates to boost rural consumption, considering the general elections in 2024?

We aren’t expecting any major incentives through tax rates this budget. We reckon there isn’t any need or room for it this time around.

Firstly, a lot of relatively sensitive pockets of the population have been shielded over the last year through subsidies on fertilisers, food, and petroleum. And with inflation coming off the peak, there anyway should be a natural easing of pressure for people, baked into assumptions for the next year, thus deeming additional benefits unnecessary.

And secondly, our prime bet is that the government will go heavy on capex this time too. The push on and development of infrastructure over the last few years have successfully spurred domestic growth and built on social capital. And if this is the path taken, maintaining 20 percent growth in capex, while being prudent on the deficit would need a status quo on factors like tax rates.

Which are the key themes that you are betting on now?

The key themes we are betting on are consumption, government, and manufacturing.

Domestic consumption has been strong despite high inflation. And with inflation off the peak and the direction for rates to possibly see a change in 2023, it could get stronger through the year. We are positive about discretionary consumer companies and the overall retail lending space.

We are also betting big on areas positively impacted by government action. This theme cuts across several dimensions including infrastructure, defence, PLI, public sector banks, and state-owned enterprises.

India’s emergence as a legit substitute for China is a multi-year theme to bet on. We are particularly looking out for companies which are embarking on aggressive capacity expansion. There are several of these plays in the mid and small-cap space, across the spectrum - from home appliances to auto parts.

Which are the two key sectors that will benefit the most from the Budget 2023?

The first must be manufacturing. The government has been strategically smart about the manufacturing opportunity with the world’s preference on China seeing downshifts. Through PLI, it has been able to incentive and support private capex. This budget too is likely to structurally benefit manufacturing companies. We see opportunities in the areas of auto components, chemicals, electrical goods, and industrial components.

Our second sectoral bet would be defence. 2022 was a brilliant year for defence companies, and the transformation underway would provide enough tailwinds over the next few years. Order books are already looking strong, and the budget’s direction on spending and where the spend is happening are both very clear.

Any thoughts on cement space? Do you think cement stocks are still trading with elevated valuations?

We are extremely positive on the cement space. This is one sector that has enough tailwinds to outperform in 2023.

A key reason is that in any two years before an election cycle, infrastructure spend by the government shoots up as execution becomes a key priority. This trend combined with the anyway high focus the government has laid on infrastructure will lead to a rise in demand. Moreover, with global cost pressures coming off the peak, next year could be good on profitability as well.

We are particularly fond of the North and West, where demand is likely to exceed supply, resulting in favourable pricing conditions. This makes us positive on Ambuja Cement, JK Cement and Ultratech Cement.

We aren’t worried about valuations as long as there is an upside on earnings and possible upgrades too.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

Sunil Shankar Matkar
first published: Feb 1, 2023 07:58 am