Rusmik Oza, who has over 23 years of experience in the capital market, advises investors to use any future market correction to increase allocation in the equities with a 2 to 3-year view, he said in an interview with Moneycontrol’s Kshitij Anand.
Oza, who is the Executive Vice-President, Head of Fundamental Research at Kotak Securities, sees inflation as a key risk to Indian equities and higher-than-expected bond yields in the future. “It is ideal to reduce exposure to defensives and gradually increase allocation towards economy driven stocks in the portfolio,” he said.
Edited excerpts:
Q) Your first reaction to Nirmala Sitharaman landmark Budget. How would you rate the Budget on a scale of 1-5 and why (5 being the best)?
A) Post the economic survey we were expecting a boundary to come but the Finance Minister hit a sixer. It is truly a budget for all. I would rate the budget at 4.5 on a scale of 1 to 5.
In a nutshell, FY22 Union Budget has rightly focussed on the economic recovery with the objective of kick-starting the investment cycle. The growth has taken precedence at the cost of higher borrowings which is the need of the hour.
Q) Do you think the government managed its finances, and at the same time delivered a Budget that could boost growth?
A) Very much. At a time when most world economies are spending huge amounts on fiscal and monetary stimulus, India cannot afford to remain conservative.
The fall in FY21 GDP will take us back and to have meaningful growth over FY20 numbers and to catch up with large economies we need high growth. In this background, it is not harmful to relax the fiscal deficit.
We find the government’s FY22 budgeted Fiscal Deficit/GDP target of 6.8% quite realistic as it has prudently budgeted for 17% growth in tax revenues and only 1% growth in expenditure over the FY21RE.
On the lower base of the first half of FY21 (due to lockdown) the direct and indirect tax collection figures look more realistic. As the government has already done a lot of work in this fiscal year the divestment figure of Rs.1.75 lakh for FY22 looks manageable.
The government has also budgeted a 26 percent increase in capital expenditure to Rs5.5 lakh crore for FY22 with 14 percent YoY growth in the key sectors of housing, railways, and roads.
Between FY20 and FY22BE (i.e. 2 years), the capital expenditure is expected to go up by a whopping 65 percent or 28 percent CAGR. This could lead to a healthy multiplier effect in the economy and allow for a faster and more productive recovery in the economy. Healthy nominal GDP growth of 14 percent should lead to an improvement in credit offtake also in FY22.
Kindly note: The higher Fiscal Deficit/GDP in FY21RE is mainly due to higher capital expenditure and the Government now including the Food Corporation of India (FCI) burden within the government’s balance sheet.
This inclusion of FCI burden has increased the overall subsidies figure in the Union Budget from Rs.2.28 lakh cr in FY20 to Rs.5.95 cr in FY21RE (jump of Rs.3.67 lakh cr). This explains part of the increase in gross market borrowing from the expected figure of Rs.10 lakh cr to Rs.12.8 lakh cr (for FY21RE).
Q) Which sectors are likely to benefit the most from the Budget and why?
A) All economy is driven and cyclical sectors will be major beneficiaries post-budget announcement. The push for capex and investments could trigger the revival of an investment cycle, in our view, which could then spread to multiple sectors like capital goods, construction, engineering, cement, metals, power utilities, oil & gas, banks, and NBFCs.
The increase in FDI limit from 49% to 74% will benefit the Insurance sector. In automobiles, the commercial vehicles segment could get a boost on the back of improved economic activity and scrappage policy.
BFSI piece as a whole could benefit because of the formation of bad bank structure and privatisation of PSU banks. Cement could be an indirect beneficiary of increased thrust on infrastructure and affordable housing.
Gas companies could also be a big beneficiary as 100 new districts will be added to the city gas distribution network and oil & gas pipelines will be monetised.
Q) Which sectors could lose because of Budget proposals and why?
A) Broadly metals & mining sector is one sector that will get negatively impacted as customs duty on flat steel has been reduced from 12.5% to 7.5%. Since metal prices are linked to import prices there could be a correction in steel prices.
Stainless Steel companies could get negatively impacted as countervailing duty on cold-rolled stainless steel flat products have been removed.
The underlying current and margins in the steel sector is quite strong so we expect this negative impact of lower import duties to get absorbed.
Q) How should retail investors decode the Budget 2021?
A) Five Key assumptions and numbers to watch in the Budget are: Nominal GDP growth rate, revenue estimates, quality of expenditure, other receipts beyond taxes, and Fiscal Deficit.
Most of the numbers apart from the Fiscal Deficit have been good and as mentioned in one of the previous questions the reason for the fiscal deficit going up is not worrying. There is no change in the tax rates, which provides a big relief to the taxpayers and also sends out a strong message to the investors globally that the government is committed to a long term low tax rate regime and provides certainty on the broad tax policy framework.
The government’s aim of bringing down the Fiscal Deficit/GDP to below 4.5% by FY26 implies that borrowing could remain at elevated levels in the next few years.
One can also interpret that capital expenditure could also remain at elevated levels for these years. This is good for equity market may not be good for the bond market.
The focus on capital expenditure in the budget boosts the prospects of growth and we can expect a structural higher earnings growth trajectory for the next few years.
Q) What should be the investment strategy post Budget 2021? Should investors use the dip to rejig their portfolio?
A) This coming growth phase for the next few years provides some resemblance to the FY04-FY08 growth phase when Nifty-50 earnings grew at a CAGR of >20%.
However, the only difference between the start of that phase and now is that in 2003 Nifty-50/BSE Sensex was trading at ~10x on Fw PE and now we are trading near 22x on Fw PE.
The re-rating game has already been played out this time so to that extent, the upside in markets can only come from any earnings surprise in the future.
We expect equity valuations to remain at elevated levels due to expected economic rebound, strong earnings print, and low bond yields. Given the rich valuations equity markets will be at the mercy of the bond markets, bond yield, and bond PE in the future.
Considering all the aspects of growth and valuation the conviction of buying on declines goes up after the budget. Investors should use any future market correction to increase allocation in equities with a 2 to 3-year view.
The key risk to Indian equities could be higher-than-expected inflation and higher-than-expected bond yields in the future. It is ideal to reduce exposure to defensives and gradually increase allocation towards economy driven stocks in the portfolio.
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.
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