Budget 2026: A slow and multi-year grind towards building long term drivers of earnings and multiples

Unmesh Sharma is the Head- Institutional Equities at HDFC Securities

• This is a budget of continuity, stability
• Stay away from high multiple sectors with slow earnings growth
• LIke financials (with a large cap bias notably private banks and insurance) and select Industrials including cement

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Let me start with a disclaimer. If you are looking for short term stock ideas, you are not going to find those here. Not because we have been unable to identify those: our Research team (working on a Sunday from office) has put out their views on that matter. It’s just that there has been a vast increase in the number of market participants in the last few years. All of those have been closely watching the Union Budget speech. We are confident that by the time this article reaches you, the most obvious short term stock ideas are already well priced in.

So I don’t think the point of this article is to say that this budget is positive for EMS and railway stocks and negative for market participants (brokers, exchanges). That is probably already well known to anyone even casually following the budget in the pink papers and the TV / online equivalents.

Having had a few hours to absorb the budget speech and the documents, we focus on the long term sector views and the macro- what does this budget mean for the investor.

First. Successive governments have diluted the relevance of the budget- and rightly so. The Budget announcement (and the Economic survey which is released on the eve of the budget) is rightly reduced to mostly a statement of Economic policy. One can look for cues on further direction, but economic governance is now an ongoing activity and important announcements now no longer wait for the budget date.

(PS. Having started his career as a consumer analyst, your scribe used to find some joy in watching ITC for cigarette tax changes in the budget. This year with the changes made on new year’s eve, even that excitement was lost).

Second. With GST and the consistent and incremental devolution of powers to the state and local governments, Union Budgets now address only a part of the state finances. This is yet again, a positive development.

Third. Expecting a big bang budget (similar to 1991) is probably not a fair expectation. A lot of the low hanging fruit has been picked. Driving aspirational real GDP growth of 7-8% CAGR now requires harder administrative and governance reforms like the recent changes in bankruptcy code, reform of land and labour laws and so on. None of these drive earnings or stock prices overnight and hence are not seen as exciting by market participants. However, for long term investors, the government is patiently building the pillars of sustained earnings growth and valuations.

In this context, what do we make of this budget?

The budget is a direct reflection of the government’s priorities and reaction to the broader environment- not just the economic scenario.

* For e.g. Volatility on all border fronts in last few years leading to the spike in defence budget

* Insipid private investment cycle leading to consistent chipping away at the hurdles like deregulation, focus on SMEs, rationalization of taxes

* Perception that India is lagging in new global emerging sectors leading to investments in AI, Cloud infrastructure and Data centres

* Increased focus on recent wins leading to measures for EMS, GCCs

* Energy (read forex) self reliance with related benefits on forex shows up in focus on Nuclear power

* Trade promotion through on budget activities like custom duty rationalization and off budget focus on FTAs

* Lessons from the Tariff saga to focus on self reliance on rare earths

* Concerns on market speculation caused the rise in F&O STT. Though we still think there should have been a reduction in LTCG especially for FPIs…. And so on.

In summary, we think this is a budget of continuity, stability and in some cases (like defence, emerging sectors and geopolitics), a sign that the government has “woken up and smelt the coffee”. As in the case of the crises like the famines of the mid 1960s and the Balance of Payment crisis of 1991, period of geopolitical shock has always led to Indian governments embarking on a decade long reform agenda. We think this is one of those moments.

We strongly believe in the India story. In that context, the country and its government has dug its heels in and put its head down to embark on a multi-year grind towards building long term drivers of earnings and multiples.

Grind is good, more sustainable than big bangs and we remain bullish on the long term story. Given market valuations which are more than one standard deviation above mean, we stick to our defensive stance and a GARP- stock specific approach based on earnings delivery.

At this time, the sectors we like are Financials (with a large cap bias notably private banks and insurance) and select Industrials including cement. We are neutral on IT and pharma.

We would use the ongoing market dislocation to buy these sectors for the long term. We stay away from high multiple sectors with slow earnings growth such as Oil & Gas, metals and the consumption basket.