Budget proposals don't change our long-term preferences: Abhiram Eleswarapu

'Consensus forecasts call for a 16 per cent earnings compounded annual growth through FY25, with margin expansion baked in across most sectors', said Eleswarapu

The Budget proposals have reinforced focus on longer-term infrastructure, asset creation, and personal investing based on the merit of the instrument rather than on tax incentives, said ABHIRAM ELESWARAPU, head of India equities at BNP Paribas, in an interview with Puneet Wadhwa. Edited excerpts:

What’s your view on the Budget proposals? Is there a hint of populism in this government’s last full Budget ahead of the2024 elections?

The Budget stuck to the glide path to bring down the fiscal deficit to 4.5 per cent of the gross domestic product (GDP), continued its thrust on long-term capital expenditure (capex) and infrastructure development while de-emphasising subsidies – and hence avoided short-term populism despite it coming ahead of crucial state and central elections. It also offered some income-tax relief to salaried employees to boost urban consumption. While the Budget looks pragmatic from an overall perspective and largely in-line with market expectations, capex, and urban consumption plays look to be the relative winners, while insurance, and rural consumption seem to be less well off.

What is the one defining characteristic according to you that makes this Budget stand out compared to the ones presented over the last few years?

The Budget reinforced focus on longer-term infrastructure, asset creation, and personal investing based on merit of the instrument rather than on tax incentives.

The Budget aims to spur consumption. How should one approach the related stocks given the valuations at which some of these counters are trading at, and the fact that the inflation has not been fully tamed?

The tax benefits will be relatively small in the large scheme of things, given that they are applicable to those taxpayers that opt for the new tax regime. While this may lead to a minor boost in urban discretionary consumption, the cut in subsidies may delay a rural consumption recovery. That said, the finance minister (FM) has continued to focus on a stated set of longer-term priorities. Overall, we find limited value in consumption stocks at these levels given their elevated earnings growth expectations and lofty valuations.

Are the estimates on fiscal deficit, government borrowing, and GDP growth too conservative?

The assumptions around revenue look reasonable given they are based on an achievable 10.5 per cent nominal GDP growth for fiscal 2023-24 (FY24). However, there may be a risk of revenue expenditure overshooting the estimate given the sharp declines factored in for food and fertiliser subsidies, especially if inflation remains persistent. Thus, the headline fiscal deficit and borrowing targets may have some risk of overshooting as there seems to be a lower margin of safety built into the assumptions as compared to last year. Moreover, the market may also focus on potentially higher extra-budgetary borrowing in addition to the headline number.

What’s your broad outlook on the markets? Do you think 2023 will be a tougher year for them to negotiate, compared to 2022 as they battle global recession fears? Are you comfortable with the current market valuation?

At 18.5x forward price-earnings (P/E), the Nifty50 index is about 15 per cent more expensive than its historical levels versus regional peers that are trading more or less in-line with their averages. Investors are now focussing on how much of the long-term story is already priced in versus other markets such as China where high frequency data has been fast improving since its re-opening. Furthermore, growth seems to be rapidly slowing in developed markets, and if inflation proves to be stickier-than-expected, interest rates could remain high across the world, which in turn could hurt equity valuations.

What are your corporate earnings estimates for FY24? Do you think they will be tweaked over the next few quarters?

Consensus forecasts call for a 16 per cent earnings compounded annual growth through FY25, with margin expansion baked in across most sectors. This may prove too optimistic. We see a high single digit upside for the Nifty by the year-end, but are cautious on the near term.

How will you as a fund manager approach the equity markets in the backdrop of the Budget? Which sectors are on your buy and sell list?

The Budget proposals do not significantly change our longer-term preferences, and in fact, largely reinforce our views. We continue to like IT services, telecom companies, private banks, consumer durables, and select stocks in infrastructure – especially those geared towards roads and Railways capex – and healthcare. We are less inclined towards mass consumption, such as fast moving consumer goods and the two-wheeler industries.