Sampath Reddy, Chief Investment Officer, Bajaj Allianz Life, who manages assets worth about Rs 70,000 crore, is positive on domestically-focused sectors like infrastructure and cement, and continues to like private banks along with IT and pharma.
In an interview with Moneycontrol’s Kshitij Anand, Reddy, who has about 20 years of experience in the capital markets, said the market will soon digest the Budget announcements and move on to fundamental factors and global cues.
Here are edited excerpts from that interview:
Q) Your first reaction to Nirmala Sitharaman’s landmark Budget. How would you rate the Budget on a scale of 1-5 and why (5 being the best)?
A) The budget has been a growth-oriented and expansionary one, and the government has not curtailed spending just to meet fiscal targets in the near term.
This was probably needed with the Indian economy seeing a record contraction in FY21—and should help to support the ongoing economic recovery—thereby helping cheer market sentiments as well.
There was a clear focus on infrastructure/capex & healthcare (along expected lines) and various measures were announced for the financial sector, which is quite positive--and the need of the hour.
Also, despite the fall in revenue collections in FY21, the government has not really raised taxes in a big way (which was a concern for markets), and therefore has helped to provide comfort.
The government has also showed a renewed commitment to privatization (or strategic divestment) with ambitious targets, after underachieving significantly in FY21--due to market volatility and the economic contraction.
Considering all this, and the challenging economic environment the government has done a good job and the budget numbers seem quite realistic and transparent, compared to previous years. Therefore, we rate the budget 4.5 out of 5.
Q) Do you think the government managed its finances, and at the same time delivered a Budget that could boost growth?
A) Yes, the budget has been growth-focused. The boost for infrastructure should help to revive investment (which has been tepid over the past few years) and help support the growth recovery.
Various measures have also been announced for the financial sector, which could help stem some of the asset quality issues (to some extent) and also help spur credit growth over time (which has slowed considerably over the past year).
A strong financial sector is quite critical to economic growth recovery. Nominal GDP is budgeted to grow by a strong 14.4 percent YoY in FY22 compared to a contraction of 4.4 percent YoY in FY21.
On the finances front, as mentioned--the government has allowed fiscal slippage (to accommodate growth) with fiscal deficit pegged at 9.5 percent for FY21 and budgeted at 6.8 percent for FY22—both of which are significantly higher than market estimates.
FY21 fiscal deficit is elevated to some extent due to govt. bringing off-balance sheet items (FCI borrowing for food & fertilizer subsidy) on to its own books compared to previous years—indicating an increase in transparency.
Due to the higher fiscal deficit, the market borrowing is also higher than market estimates—with gross market borrowing budgeted at Rs. 12.88 trillion and Rs. 12.06 trillion for FY21 and FY22 respectively.
The higher borrowing figure will create supply-side pressure and has led to some hardening of bond yields. The Finance Minister mentioned that they would continue on the path of fiscal consolidation and gradually reduce fiscal deficit to 4.5% by FY26.
Therefore, once growth is back on track for India, it is important for the government to once again bring fiscal discipline and consolidation back into focus.
Q) Which sectors are likely to benefit the most from the Budget and why?
A) The budget has a push towards infra/capex and healthcare, and has also announced various positive measures for the financial sector.
For the infrastructure sector, the government has budgeted Capex growth at a healthy 26 percent YoY for FY22. In FY22, capex as a percentage of GDP is budgeted to rise to the highest level in 14 years with the outlay for capex to have doubled in 4 years.
The earlier announced PLI (Production Linked Incentive) scheme will help to boost local manufacturing across 13 sectors with an outlay of Rs.1.97 trillion.
The government has raised customs duties on mobile components, compressors, automobile parts, and some other items—to encourage domestic manufacturing and promote the Atmanirbhar Bharat scheme.
The govt announced setting up a new development finance institution for long-term infra financing (lending target of Rs. 5 trillion over 3 years).
Higher healthcare spending is the need of the hour, with India’s healthcare spending (as % of GDP) being lower than other peer emerging countries, and in light of the Covid-19 pandemic.
Total healthcare & wellness outlay in the budget has been increased by a lofty 137 percent in FY22 to Rs. 2.24 trillion. Govt has allocated Rs.350 billion for Covid-19 vaccination.
A new scheme has been launched by govt. with an outlay of Rs 642 billion over 6 years to augment health infrastructure under PM AtmaNirbhar Swasth Bharat Yojana; in addition to the National Health Mission budget.For the financial sector various positive measures have been announced as follows:
. The govt. announced that it plans to privatize two PSU banks and a PSU general insurance company in FY22
. For FY22 PSU bank recapitalization plan of Rs. 200 billion announced
. Announced an increase in FDI for insurance sector from 49% to 74%, which is a positive move and will help attract foreign capital flows into the sector
. An asset reconstruction firm (bad bank) to be set up to address stressed assets of banks; manage & dispose-off such assets to AIFs & potential investors
. Affordable housing benefit: Extended eligibility by 1 more year for additional deduction of Rs 1.5 lacs for purchase of affordable houses till March 2022
Also, there has been no change in taxation on legal cigarettes in this budget (contrary to market expectation) which is positive for cigarette companies.
Q) Which sectors could lose because of Budget proposals and why?
A) The government’s focus on capex is leading to muted spending on the rural sector in FY22. Spending on rural dominated segments such as MNREGA / agriculture spending is budgeted to decline by 34 percent in FY22, after growing by 59% in FY21.
Q) How should retail investors decode the Budget 2021?
A) There have been no major tax changes for retail investors in this budget. This is quite positive, considering that there has been a fall in tax collections in FY21 due to the economic contraction (and some tax increases were being expected by the market).
However, with the economy expected to grow strongly in FY22 (nominal GDP growth of 14.4%), gross tax revenue has been budgeted to grow by 16.7 percent vs a contraction of 5.5 percent in FY21.
The government has budgeted for some buoyancy in the direct taxes--with both income tax and corporate tax budgeted to grow by ~22 percent YoY in FY22.
Government’s spending on health and capex financed through better tax collection in FY22 should provide the necessary growth impetus in the ongoing economic revival.
Also, some measures have been announced by the government to simplify the tax administration as follows:
. Most of the income will be pre-filled in tax returns
. Faceless assessment of tax
. Ease in compliance and reduce litigation; prior cases can be reopened only up to 3 years vs 6 years earlier
. Senior citizens who are 75 years or above and have only pension and interest income in a financial year, are exempted from filing income tax returns.
Q) What should be the investment strategy post Budget 2021? Should investors use the dip to rejig their portfolio?
A) We are turning positive on domestically focused sectors like Infrastructure and Cement and continue to like private banks. We also believe global export-oriented sectors like IT, pharma would continue to do well.
The equity markets have cheered the budget with it being growth-oriented, and no major tax changes or levy. However, the bond markets have seen some hardening in yields due to the higher than expected fiscal slippage and government borrowing.
The market will soon digest the budget and move on to fundamental factors and global cues. Corporate earnings in Q3 FY21 have been above expectations and are expected to see robust growth of around 30% (for the Nifty index) in FY22.
Even though market valuations are elevated, the recovery in corporate earnings and the easy liquidity scenario globally may help to support valuations for some time.
Overall, FY22 will be the year of normalization (from the Covid-19 pandemic) and will set the stage for acceleration in future growth.
From an investment perspective, at this juncture, investors should systematically invest in equities, or use an asset allocation approach (based on their risk profile).
Q) After a strong primary market in 2020, do you see a similar trend in 2021? Any big companies you are keeping an eye on. The FM made clear the intentions of listing LIC soon. What are your views on that? How big that could be?
A) With equity markets being buoyant, retail participation and equity fund raising have picked up significantly. Equity issuances (via IPO, QIP, OFS & OFS route) breached Rs. 1.4 trillion in CY2020 (higher than in CY2017), and the pipeline remains strong. The equity fund raising activity will depend to some extent on market conditions in 2021.
The government has also announced a major push for privatization / strategic divestment, and also some big-ticket IPOs like LIC IPO (and more may be announced along the way).
The govt. has budgeted an ambitious divestment revenue of Rs. 1.75 trillion in FY22 and that should keep fund raising activity via the market & via strategic divestment route quite active over the next year.
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