Domestic cyclicals key gainers from the infra push in the Budget

Street is bearish on exporters while there is a mixed opinion on the consumption basket

The Union Budget for FY24 ticked all the right boxes, sticking to its ongoing focus on spending-led growth, staying on the path of fiscal consolidation and shunning outright populism. This, coupled with tax breaks, had a positive impact on the markets with the Sensex closing marginally in the green after a volatile session.

The overarching emphasis on infrastructure with a sharply higher allocation than what the Street was working with was the biggest takeaway from the Budget. Capital expenditure (capex) on infrastructure was up 33 per cent to Rs 10 trillion; this is the third consecutive year where the investment outlay has been increased by 30 per cent or more. The Finance Minister indicated that the capital investment outlay will be 3.3 per cent of gross domestic product (a 19-year high) and thrice that of outlay in FY20. The Budget has also increased the allocation to railways at Rs 2.4 trillion, which is nine times higher than the outlay in FY14.

The government is hoping that the investment push will help enhance growth potential, increase job creation, crowd in private investment that has been sluggish, and offer a cushion against global headwinds. The higher-than-expected public capex, according to IDFC Mutual Fund’s head of fixed income Suyash Choudhary could be that private capex may not sustain with vigour in the face of rising global uncertainties and hence public sector needs to keep up the pace.

Brokerages expect the rise in capex to be a force multiplier, benefitting a number of sectors such as steel, cement, commercial vehicles, mining and construction equipment segment. In addition to industrials, Morgan Stanley Research is positive on financials and discretionary consumption. The brokerage expects the Street to increase their earnings estimates due to the positive impact of the Budget.

While the infra focus and the 5.9 per cent fiscal deficit target for FY24 are positive, a lot would depend on how growth pans out. Analysts led by Sonal Varma of Nomura Research expect growth to slow down given developed market recession and lagged impact of tighter monetary policy. The resulting lower nominal GDP growth may hit tax revenues. While the government can still meet its 5.9 per cent deficit target, it will have to cut back on projected capex, they added.

Even as the infrastructure/capital goods stocks hogged the limelight initially during the Budget speech, the only two segments, which ended in the positive among the basket of sectoral indices were defensives — the BSE Fast Moving Consumer Goods (FMCG) and the BSE Information Technology. The gains in the FMCG space was led by ITC which was up 2.6 per cent as the National Calamity Contingent Duty or NCCD hike translates to 2-3 per increase and will not have a major impact.

What could give the consumption theme a boost are tax breaks in the form of higher tax rebate, and fewer slabs under the new tax regime. Reduction in the surcharge rate is also expected to bring down personal income tax in the highest tax rate of 42.74 per cent to 39 per cent.

Though these measures are positive, the Street was expecting higher spending in the rural sector as this was lagging in the last two years. Even as demand conditions in the rural sector are weak, the lower allocation to rural employment guarantee scheme and PM Kisan may be a dampener for consumption-related sectors.

While insurance was the worst-impacted sector, given that tax free status was removed for certain insurance policies with premium over Rs 5 lakh, there was little for the real estate as well. The government did not enhance the interest deduction on housing loans and capped the deduction on reinvestment of capital gains in residential real estate at Rs 10 crore.

Though the overall Budget is positive especially for the domestic sectors, demand recovery, stability in margins and lower interest/financing cost would be key for earnings revival going ahead.