Daily Voice: Aggressive divestment plan unlikely in Budget, time to pick chemical stocks, says Green Portfolio's Divam Sharma

Divam Sharma is the Co-Founder and Fund Manager at Green Portfolio

In the Union Budget 2025, "it appears unlikely that the Finance Minister will unveil an aggressive and ambitious divestment plan for FY26," said Divam Sharma, the Co-Founder and Fund Manager at Green Portfolio in an interview to Moneycontrol.

According to him, instead of pushing for large-scale privatisation, they seem to be shifting gears, focusing more on strengthening state-owned enterprises with hefty financial backing rather than selling them off.

Further on the RBI policy next week, he believes rate cut seems highly likely, considering the current liquidity situation and falling inflation globally.

Among sectors, he has started seeing an opportunity in the chemical sector. He believes that the sector has bottomed out hence, would perform well in the coming years. "This is the right time to invest in chemical stocks," said Divam with more than 15 years of experience in investment management.

Do you think the market will possibly experience another 5% correction from here before gaining strong momentum again?

Yes, this downward pressure that we are witnessing in the markets should continue as the market currently has no direction. The weakness in preliminary banking stats, sanctions on Russian oil by the US, uncertainty of Trump’s attitude towards India are short term negative sentiments driving the market. Clarity on Trump’s tariffs on China and approach towards Indian exporters once the office is taken will provide state of certainty to the markets.

In the next three weeks, we have material events including the Union Budget announcement - until then, we are likely to see 5-7 percent correction in the markets. A weak Budget parallel to the 2024 July budget could shock the markets. No mention of railways, infra, and defence will result in valuations of these sectors dropping to 30-40x levels.

If the government comes out with a robust tax framework and better execution of agreements in public and private sector, markets might open and close on an exhilarating note. Although we are certain of the short term volatility to remain, as a fund, we are seeing a robust set of Q3 results and we are sure we would ride on rally once the global pressures waves off.

Are the banking and financial services sectors available at reasonable valuations?

The latest data released by RBI paints a clear picture on India’s lending and deposit growth. Lending increased 11.5 percent year-on-year while deposits rose 10.8 percent in the same period. Banks need deposits or other funding sources to sustain their lending activities. If loan growth outpaces deposit growth, banks face liquidity shortages. The credit-to-deposit ratio (CDR) has marginally increased to 80.4% from 79.9% a year ago. A high CDR indicates potential risks to liquidity and profitability for banks, necessitating caution. To maintain liquidity, they must attract more deposits by offering higher interest rates, squeezing their NIMs.

Certain banks like HDFC Bank, Axis Bank have already declared their results and we saw a growth in the unsecured retail segment. Micro-finance lenders are likely to experience a sharp rise in slippage and overdue loans. Similarly, unsecured loans like credit cards may see an increase on a quarter-on-quarter basis. In contrast, segments such as vehicle finance, housing finance, secured retail, and mid-to-large corporates appear to be on firmer ground.

As far as the outlook is concerned, there are no immediate signals that deposit growth or mix would improve in the quarters ahead. If rates are cut, private banks’ NIMs would fall before PSBs (public sector banks). Household debt is at an all-time high of Rs 121 lakh crore as compared to Rs 76 lakh crore during Covid peak. A minor increase in inflation, hence the interest rates, could trigger default payments. Public sector banks derive a significant part of their operating profits from recovery income, which tends to be unpredictable.

While this source of income appears stable for the next two to three quarters, in the medium to long term, PSBs will need to focus on strengthening their core income streams to compensate for the likely decline in recoveries. We maintain a hold rating on the sector as we see all macroeconomic factors like GDP growth, inflation, interest rates, LDR (loan-to-deposit ratio) playing against the sector.

Have you started accumulating in the chemical sector?

Yes, we have started seeing an opportunity in this sector. We feel that the sector has bottomed out hence, would perform well in the coming years. Anti-China sentiments coupled with import substitution was making it hard for domestic players to survive. We believe this is the right time to invest in chemical stocks.

The Indian chemical industry is at a significant inflection point, benefiting from global supply chain shifts, China’s regulatory constraints, and increasing export opportunities. With China struggling with overcapacity and deflationary pressures, global players are looking to diversify their sourcing, and India is emerging as a key beneficiary. Indian chemical companies have significantly ramped up capital expenditures, nearly tripling their investments in recent years to expand capacity and enhance competitiveness.

The specialty chemicals segment, in particular, is expected to grow at a rapid pace, outpacing global averages, as companies invest in R&D and enter high-value niches like fluorochemicals, catalysts, EV battery materials, and green chemistry. Despite short-term pricing pressures due to China’s aggressive capacity additions, Indian players with strong balance sheets, diversified portfolios, and sustainable manufacturing practices are poised for long-term outperformance.

The industry’s shift toward backward integration, process innovation, and ESG compliance is also attracting global partnerships and premium valuations. While risks such as demand cyclicality and input cost volatility persist, companies with strategic expansions and strong execution are well-positioned to capitalize on this transformation. Given these dynamics, I see immense potential in the sector and have positioned myself accordingly.

Considering the domestic and global economic environment, what measures would you announce if you were the Finance Minister?

Since last budget was a populist budget after BJP regained power for the third time in general elections conducted last year, I’d try for this budget to bring a little break for the middle class comparatively, considering the low level of consumption trends this year, especially the rural demand. Focus would remain on public infrastructure. Highways, Roads, Railways will be key focus areas. Railway tracks are something that I might put pressure on because the current layout is not suitable for high speed trains.

Airlines are something that the government has been missing out on since last decade and even the current airlines with major market share have been struggling. After the power shift in the US, sectors like IT and Pharma might see a boost backed by strengthened dollar revenues. This would mean for me to focus more on improved healthcare and R&D. Shrimp export has been getting attention from the last 3-4 years but nothing substantial has come out of it. Inflation is close to RBI’s target but we could see a fluctuation in rate cut. I’d also come out with a robust tax framework and better execution of agreements in the public and private sector.

Is there a strong possibility of the Finance Minister coming out with an aggressive and ambitious divestment plan for FY26?

It looks like the Indian government is cooling off on its aggressive divestment plans for FY26. Instead of pushing for large-scale privatisation, they seem to be shifting gears, focusing more on strengthening state-owned enterprises with hefty financial backing rather than selling them off.

For instance, we know the government plans to invest approximately $1.5 billion in rescue packages for two state-owned firms, including helicopter operator Pawan Hans, after unsuccessful attempts to privatise them.

Additionally, the privatisation of at least 9 state-owned units has been put on hold due to opposition from various ministries. This change seems to be driven by the hope that reviving public sector companies will make them profitable again and bring in steady dividend income. Given all this, it appears unlikely that the Finance Minister will unveil an aggressive and ambitious divestment plan for FY26.

Do you see more than a 70% probability of a repo rate cut by the RBI in February?

Rate cut seems highly likely, considering the current liquidity situation and falling inflation globally. The Indian economy is showing signs of a slowdown, where consumer demand is weakening and GDP growth projections are around 6.6% for FY25, down from 8.2% from the previous year. The RBI has already taken steps to ease liquidity stress, including bond purchases and dollar/rupee swaps, injecting around Rs 1.5 lakh crore into the banking system. However, foreign institutional investors (FIIs) have been withdrawing capital due to the US Federal Reserve’s stance on keeping rates high for longer. This has created a liquidity crunch in Indian markets, which could further dampen economic activity.

The rupee’s depreciation, hitting record lows against the US dollar, adds another layer of complexity. A weaker rupee raises import costs which potentially makes inflation go higher. This might make the RBI hesitant to cut rates too soon. Meanwhile, global inflation is easing, and major central banks, including the Fed and the European Central Bank, are signalling potential rate cuts later in 2025, which could give the RBI room to act.