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'Budget 2021: See re-rating in construction and PSU stocks; here are 16 large, midcap picks'

No wonder, the markets are not perturbed by the higher-than-expected fiscal deficit of 6.8 percent in FY2021-22 and the gross government borrowings figure of Rs 12 lakh crore.

February 01, 2021 / 07:04 PM IST

The Budget highlights a significant shift in the government's fiscal policy stance. Growth is high on the government's priority list. The Budget proposes to support the economic growth by substantially higher outlay for healthcare, infrastructure development & other capital expenditure programs. The focus seems to be put the Indian economy on a higher growth trajectory for the next few years by taking an expansionary fiscal stance.

Importantly, the policy framework is moving away from the piecemeal divestment program to aggressive privatisation of the public sector companies, especially in the non-core sectors. In addition to privatisation of IDBI Bank, the finance minister aims to privatise two public sector banks and a general insurance company in the next fiscal.

In the Budget, the government has also announced some pragmatic proposals to fund the capital expenditure and infrastructure development projects. It proposes to set up Development Financial Institution (DFI) with initial equity contribution of Rs 20,000 crore with target to provide credit to tune of Rs 5 lakh crore to infrastructure projects over the next five years. Also to fund the capital expenditure, there is a clear intent towards monetisation of existing assets of public sector companies and attract foreign capital into Indian infrastructure space.

Lastly, the government has finally warmed to idea of setting up a bad bank – a new entity where bad loans of all public sector banks can be transferred in order to clean up the balance sheets of the public sector banks. Banks are lifeline of an economy and essential to support an economic upcycle.

No wonder, the markets are not perturbed by the higher-than-expected fiscal deficit of 6.8 percent in FY2021-22 and the gross government borrowings figure of Rs 12 lakh crore. Markets seem to appreciate the fact that the government has tinkered with the income tax rates. The proposed increase in expenditure is expected to be funded by a higher deficit not only in FY2021-22 but also over the next few years. Though this could mean higher government borrowings and hardening of the bond yields, the high priority on growth has boosted market sentiments. Moreover, Reserve Bank of India (RBI) is expected to take necessary monetary policy steps to calm the bond markets.

Close

In terms of fiscal math, the assumption seems to be quite realistic with 14.4 percent growth in nominal GDP and 16.7 percent increase in gross revenue receipts in FY2022 as against revised figures of FY2021. Disinvestment receipts of Rs 1.75 lakh crore should be achievable if the government is able to go through with public offering of LIC of India in the next fiscal.

Markets have given a thumbs up to the budget. The focus would revert back to quarterly earnings and global cues now. The Q3 results season has been quite encouraging with majority of the companies exceeding expectations. We expect the consensus earnings estimates for FY2022 and FY2023 to get upgraded again and provide support to premium valuations. Given the focus of the Union Budget on capital expenditure on infra developments, strengthening of banks and privatisation, we see continued re-rating of construction, building material and public sector companies.

Investment Picks

Largecap picks are ICICI Bank, SBI, M&M, L&T, HDFC Life, HCL Tech, UltraTech Cement, Power Grid.

Midcap picks are JK Lakshmi Cement, AU Small Finance Bank, Polycab, Kajaria Ceramics, Supreme Industries, Max Financial Services, CESC and Tata Consumer Products.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Gaurav Dua is the SVP, Head Capital Market Strategy & Investments at Sharekhan by BNP Paribas.
first published: Feb 1, 2021 07:04 pm

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