PM's announcement is manna from heaven; these sectors are likely to gain most

This is the largest stimulus package among the emerging markets (EMs), bigger than that of a few OECD countries, including Canada and South Korea, as well.

Anand Rathi, in a report said, as the stimulus would be unveiled by the Finance Minister in phases, it may be in line with most other countries.

"We expect for India too, a relatively small part – Rs 4-6 lakh crore (2-3 percent of GDP) would be fiscal measures (direct spending or revenue foregone measures). The rest would be through contingent liabilities like loan guarantees or temporary payment deferrals," Anand Rathi said.

The impact on the economy

Anand Rathi said if the announced Rs 20 lakh crore takes the form of direct spending or government revenue foregone in FY21, it would mean almost the whole damage inflicted by the pandemic would be assumed by the government.

"While funding it would be challenging and such large spending would create longer-term problems, in the near-term, the economy would get a strong boost," said the brokerage.

"Yet, with Rs 21-22 lakh crore revenue in FY21 (excluding market borrowing) and large committed spending (e.g. Rs 7 lakh crore in interest payment), as argued before, no more than Rs 4-6 lakh crore is likely to be in fresh (not already budgeted) spending/revenue forgone. Even assuming multiplier of 1.5 times for government spending, the direct measures would create an overall impact of Rs 6-9 lakh crore," Anand Rathi said.

The impact on the market

The announcement of a large stimulus package by the Prime Minister is a big sentiment booster for the equity market.

However, Anand Rathi is of the view that the expectation of large fiscal slippage can be negative for the debt market. Likely large OMO can partially counter-balance debt market sentiments.

Along with the stimulus, the Prime Minister had mentioned long-term reforms, including land and labour, are on cards. This is also expected to augur well for the market.

"In India, major structural reforms have been initiated in periods of crisis. Such a track record would put additional credence to the success of politically sensitive reforms during this period of crisis. The commitment for such reforms also boost market sentiments," said Anand Rathi.

Long-term positive for pharma, infra

Anand Rathi said the import substitution can boost domestic production. "With the appropriate incentive, API and CRAMS can get a big boost," it said.

On the other hand, under import substitution and incentive to foreign players to set up base in India, companies in chemical sector may see both earnings acceleration and re-rating, said the brokerage.

The infra sector is going to get a fillip due to the Prime Minister's focus on infrastructure as he talked about the restarting of stalled projects.

"Public and foreign-funded domestic construction activities are likely to see improvements. Infra construction has a large reliance on the bank-funded working capital. The likely introduction of loan guarantee also would help the sector," said Anand Rathi.

The government's announcement is also likely to be positive for consumer durables.

Anand Rathi believes a significant part of durables – both electronic and electrical – are likely to benefit from import substitution policies. Under an appropriate policy framework, India can emerge as a global hub in certain niches of such products such as mobile phones and ACs.

In the space of consumer staples and retail, loan guarantees and other measures may reduce the stress of the MSME sector and thereby limit the market share gain of the larger players.

The expected loan guarantees would reduce the stress of the auto ecosystem including the cash-starved dealers and certain ancillaries.

"Despite sentiment boost for the consumers, greater focus on savings can lead to down trading. This is likely to be positive for two-wheelers and small cars," Anand Rathi said.

For the real estate sector, unsold inventory, coupled with relatively sticky prices in residential real estate are key drags. There are also uncertainties regarding future occupancy rates in hospitality and rental rates in commercial real estate, said Anand Rathi.

"If interest subversion and loan guarantees become a part of Stimulus 2.0, these can aid the sector. The softer interest rate would also help," the brokerage said.

Anand Rathi is 'overweight' on pharma, chemicals, infra construction, consumer durables and two-wheelers and small cars.

The brokerage is 'equal-weight' on consumer staples, retail, capital goods, auto, real estate and cement.

Long-term negative for financials, IT

Anand Rathi is underweight on financials even as the stimulus is expected to be banks and NBFCs as it may focus on loan restructuring and credit guarantee of them.

"Restructuring along with credit guarantee is more like 'kicking the can'. While after restructuring, NPA may not go up for a few quarters, NPA would follow the economic cycle. We feel that economic growth would be subdued in the next couple years and NPA cycle would eventually pick up and by then credit guarantees would time out," said Anand Rathi.

Moreover, investors may also look through improvements in the reported fundamentals of financials due to regulatory forbearance, interest subversion, conditional loan forgiveness, etc., Anand Rathi highlighted.

For the IT sector, if India embarks on an import-substituting economic development model, that can be negative for the sector.

"In countries pursuing import-substituting industrialisation, public policies eventually turn negative for export-oriented industries. Besides, successful import substitution would lead to an appreciation of the rupee. Moreover, if India uses tariff and non-tariff measures to support import substitution, major trading partners including the Euro area, US and UK can retaliate against exports from India including service exports," said Anand Rathi.

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