Beyond Budget Sectors To Bet On
Providing a broad-spectrum booster shot to the economy, Union Budget 2022-23 is progressive, especially with its emphasis on building the infrastructure of the country. The Finance Minister clearly emphasised the top priorities of the government – PM Gati Shakti for sustainable growth, inclusive development, productivity enhancement and financing of investments. Shreya Chaware and Armaan Madhani furnish an indication of how it will impact different sectors
It would not sound too exaggerated to define the 2022-23 Union Budget presented by Finance Minister Nirmala Sitharaman a “blueprint for India’s AmritKaal”. As India celebrates 75 years of independence and prepares to spend the next 25 years in building its position as a global power to reckon with, the budget is likely to serve as a guiding light on India’s pathway to prosperity and international dominance. Prime Minister Narendra Modi has been an unwavering votary of disrupting the status quo to ring in transformational change. The ideas he brings to governance put the citizen at the forefront of policy-making.
The Union Budget continues that tradition by bringing in several new ideas and fitting them snugly in the framework of government policies and expenditure. On the day of the Union Budget announcement, the capital markets witnessed two diverse trends. In a volatile session, Indian equities rose after fading losses in afternoon deals post the budget announcements. The yield on the benchmark 10-year bond increased by as much as 21 basis points to 6.89 per cent, the highest since July 2019. The rupee slipped 0.2 per cent to ₹74.74 per dollar. It seems that the equity markets were impressed by the budget but the bond markets were not.
Sharing comments on the budget announced, B Gopkumar, MD and CEO, Axis Securities, said, “We believe infrastructure will perform well, clearly because of the great impetus. Cement and metals should also start picking up. Banking should see improvement in the forthcoming quarters with GDP growth aiding credit growth.” Talking about the debt markets, there were two structural areas that were eyed on to be dealt with in the Union Budget but were not touched upon. First, the bond markets expected the Finance Minister to issue a clarification on the likely date of inclusion of Indian government papers in the global bond indices.
This was expected to accelerate the passive bond flows; however, the budget was mute regarding this topic. Secondly, the budget was also silent regarding some big announcements on allowing sovereign foreign borrowings which the bond markets were expecting. As regards the equity markets, the budget set up a structural story. On an overall basis, there were no measures that promised instant gratification like scrapping of LTCG(Long Term Capital Gains) tax on equities, reduction of STT(Securities Transaction Tax) or cut in Dividend Tax. There was also no mention of additional tax sops to individuals. However, the budget did contain some important measures which could have a long-range salutary impact on the markets.
Winners of the Union Budget 2022
Infrastructure
Union Budget 2022 persists to embellish on the vision drawn in the previous budget as infrastructure continues to be one of the key focus areas. The central government has enthusiastically hiked public capital expenditure by a whopping 35.4 per cent from ₹5.54 lakh crore in the previous budget to ₹7.50 lakh crore. The Finance Minister has emphasized substantial public investments for modern infrastructure which will be guided by the new PM GatiShakti programme. This new scheme is a transformative approach for economic growth and sustainable development driven by seven engines, namely, roads, railways, airports, ports, mass transport, waterways and logistics infrastructure.
A pivotal highlight of the scheme is that the national highways network will be expanded by 25,000 km in 2022-23 and ₹20,000 crore will be mobilised through innovative ways of financing to complement the public resources. Additionally, allocation towards the scheme Pradhan Mantri Gram Sadak Yojna was increased by ~35 per cent in FY23 to ₹19,000 crore. Also, contracts for implementation of multimodal logistics parks at four locations through PPP(public-private partnership)mode will be awarded in 2022-23 and 100 cargo terminals for multimodal logistics facilities are to be set up in the next three years. This bodes well for big infrastructure contractors, particularly road-laying EPCs such as Larsen and Toubro, IRB Infrastructure Developers, Dilip Buildcon, JMC Projects (India), Gayatri Projects, PNC Infratech and KNR Constructions.
Real Estate
To give a fillip to the ‘housing for all’ initiative and step up economic activities, ₹48,000 crore budget allocation has been announced for the PradhanMantriAwasYojana (PMAY) for the fiscal year 2022-23, which is 75 per cent higher than the ₹27,500 crore budget allocation made in FY22. In addition, the customs duty exemption given to steel scrap last year has been extended for another year to provide relief to MSME secondary steel producers. Also, certain anti-dumping duties have been permanently revoked on imports of several metal products in larger public interest considering prevailing high prices of metals.
These measures will help expand the supply of such metal products and soften prices, which will be beneficial for real estate companies across the board. Well-established residential real estate players with strong brand recall such as Godrej Properties, DB Realty, Prestige Estates Projects and Brigade Enterprises stand as prime beneficiaries to these announcements. Furthermore, the budget’s focus on infrastructure and logistics spending will be of substantial benefit for commercial real estate as well.
To quote an excerpt from an article published by NDTV, “The prime minister’s Gati Shakti and other government announcements to set up multi-modal logistics parks to connect urban transport to railways will drive significant investments in logistics and warehousing. The infrastructure status to data centres will propel the industrial and commercial segments of real estate through increased institutional investments. The proposed new legislation around special economic zones (SEZs) should lead to increased capacity creation for industrial and commercial development. This is further expected to accelerate the real estate investment trust (REIT) story, with the emergence of sizable industrial and commercial assets.”
Cement and Steel
The massive increase in allocation to the above mentioned infrastructure segments will also have a positive ripple effect on input industries such as cement and steel. Key beneficiaries include UltratechCement, ACC, Ambuja Cement, Shree Cement, Tata Steel and JSW Steel. Another announcement in the budget was that the custom duty on steel scrap including stainless steel scrap will remain zero for FY23. This comes as a relief to the secondary steel producers in the MSME sector and negative for primary steel manufacturers.
Railways
FM Nirmala Sitharaman in her budget speech said, “Indian Railways will develop new products and efficient logistic facilities for small farmers and small and medium enterprises. Besides, ‘One Station-One Product’ will be promoted to help local businesses and supply chains.” The allocation to the Railway Ministry has been increased from ₹1.17 lakh crore to ₹1.40 lakh crore. Major announcements include 2,000 km of network to be brought under Kavach, the indigenous worldclass technology for safety, and capacity augmentation in 2022-23. Under the GatiShakti programme 400 newgeneration Vande Bharat trains will be developed and manufactured during the next three years. Companies like Indian Railway Catering and Tourism Corporation (IRCTC), IRCON International, Rail Vikas Nigam, Titagarh Wagons, Texmaco Rail and Engineering and other companies supplying ancillaries to railways are likely to benefit.
Defence
The capital expenditure outlay for the defence sector has increased significantly by 13 per cent in FY23 to ₹1.52 trillion from ₹1.35 trillion in FY22. The Finance Minister has also announced that 68 per cent of the defence budget will be allocated to domestic industry in 2022-23, which is up from 58 per cent in the previous budget. The government has also set aside 25 percent of its budget in defence research and development for collaboration with the private industry.
Companies to benefit from the same include Bharat Dynamics, Hindustan Aeronautics, Bharat Electronics, Garden Reach Shipbuilders and Engineers, Paras Defence and Space Technologies, Adani Enterprises, Titagarh Wagons and Zen Technologies.
Capital Goods
The basic customs duty (BCD) exemption rate will be withdrawn for imports of capital goods by textile, power and petroleum companies. This measure is beneficial for companies involved in manufacture of these in India. At an estimated cost of ₹44,605 crore, the implementation of the Ken-Betwa Link Project is aimed at providing irrigation benefits to 9.08 lakh hectares of farmers’ lands, drinking water supply for 62 lakh people and generating 103 MW of hydro power and 27 MW of solar power. This is favourable for capital goods companies. It has also been proposed to phase out the concessional rates in capital goods and project imports gradually and apply a moderate tariff of 7.5 per cent.
The current coverage of ‘HarGhar, Nal Se Jal’ is 8.7 crore households; of this 5.5 crore households were provided tap water in the last two years itself. Allocation of ₹60,000 crore has been made with an aim to cover 3.8 crore households in 2022- 23. This will be fruitful not only for PVC pipe players such as Astral, Finolex Industries, Prince Pipes and Supreme Industries but also for water infrastructure management companies like PNC Infratech and KNR Constructions.
An announcement was also made in the budget speech for promoting the start-ups to facilitate the ‘Drone Shakti’ scheme through varied applications and for Drone-As-A-Service (DrAAS). As per the budget speech, an agri-tech fund will be introduced through NABARD to promote the use of ‘Kisan Drones’ for crop assessment, digitization of land records, spraying of insecticides, and nutrients. RattanIndia Enterprises, Zen Technologies and DCM Shriram Industries are key players listed on the bourses that are operating in the drone space and possibly stand to benefit from this initiative.
FMCG and Retail
The government has announced the rationalising of import duty on cut and polished diamonds and gemstones to 5 per cent from the earlier 7.5 per cent, a simplified regulatory framework for jewellery export through e-commerce and customs duty of Rs400 per kilogram to disincentivize import of undervalued imitation jewellery. This will positively benefit the jewellery companies like Titan, TBZ, Kalyan Jewellers and Thangamayil Jewellers.
Moreover, duty has been reduced by 10-15 per cent on certain inputs required for shrimp aquaculture in order to boost exports. This is favourable for fisheries companies and manufacturers of aquaculture products such as Avanti Feeds and Apex Frozen Foods. There has also been a reduction in customs duty on cocoa beans from the earlier 30 per cent to 15 per cent. This will be helpful for manufacturers of chocolates and other related products such as Nestle and Britannia.
Telecom
Under the BharatNet project, under PPP model, contracts for laying optical fibre in all villages, including remote areas, will be awarded in 2022-23. Completion is expected in 2025. Laying optical fibre in villages to bring rural access to e-services, communication facilities and digital resources at par with urban areas develops an optimistic future outlook for telecom infrastructure enablers such as Tejas Networks, Sterlite Technologies, Aksh Optifibre, Vindhya Telelinks and HFCL.
Solar Energy
In the previous budget, the Union Cabinet had approved ₹4,500 crore performance-linked incentives (PLI) scheme to boost the domestic manufacturing capacity of solar PV modules. In the recent budget an additional amount of ₹19,500 crore has been allocated to the scheme for manufacture of high-efficiency modules with priority to fully integrate manufacturing units from polysilicon to solar PV modules and thereby reduce import dependence on China. The government has an ambitious goal of 280 GW of installed solar capacity by 2030. Borosil Renewables, which supplies glass panels for these modules, is a direct beneficiary of this announcement. Other prominent solar energy players that investors should keep on their radar are Tata Power, Adani Green Energy, NTPC, Sterling and Wilson Renewable Energy, Shakti Pumps and Websol Energy.
Finance
With the heavy capital expenditure target set for FY23, we will see a lot of momentum in employment generation, along with benefits to large-scale manufacturing, micro, small and medium enterprises (MSMEs), infrastructure and the services sector. Thisis positive for banks and NBFCs as the new capex cycle will drive much needed credit growth in the finance system. The Emergency Credit Line Guarantee Scheme (ECLGS) hasbeen extended up to March 2023 and its guarantee cover will be expanded by ₹50,000 crore to total cover of ₹5 lakh crore, with the additional amount being earmarked exclusively for the hospitality and related enterprises. This scheme provides collateral-free loans to stressed MSMEs and it will help the banking sector revive credit growth. The further allocation of ₹48,000 crore for the PM AwasYojna will have a positive impact on the housing finance companies such as AAVAS Financiers, Home First Finance and Canfin Homes – especially those catering to the lower income level customers.
Budget and Equity Markets
Over the last 10 years, it was observed that the benchmark indices have mostly been range-bound during pre-budget days, only to rise after declaration of the budget. In fact, the Union Budget is observed to be the most important aspect of market movement. Traditionally, until 2016, the budget was announced on the final working day of February. Now it is presented in the parliament on the first working day of February. In line with the same, the periods just before and after assume much significance for market movement.
In terms of the post-budget session, the last 10 years’ data depicted decent volatility after one month of declaration of budget as indices moved in the range of negative5.2 to positive 8.25 per cent. As per the data, since 2012, the market fell six times while rising similarly four times in the month after the Union Budget was presented. Over 2012-21, the market reported negative returns in the one-month period post announcement of the budget in 2012, 2013, 2015, 2018, 2019and 2020. The 9 month and 3 month performance of the market post budget showed a greater volatility as seen in the data presented. If we observe the performance of the equity markets from the budget of 2021 to the current budget, BSE’s Sensex has gained around 21 per cent whereas in broader markets the BSE Small-Cap and BSE Mid- Cap indices gained 60.71 per cent and 33.53 per cent, respectively.
Amongst the sectoral indices, BSE Power index was the largest gaining index recording gains of 91.72 per cent. In the previous budget, major provisions for the power sector were Production Linked Incentive (PLI) scheme of ₹4,500 crore for high efficiency Solar PV modules (PLI scheme of nearly ₹1.97 lakh crore over five years starting FY 2021-22 for 13 sectors were announced in the budget). BSE Power Index was followed by BSE Metal and BSE Realty indices recording an increase of 71.65 per cent and 50.34 per cent, respectively. On the other hand, BSE FMCG index was the lowest gaining index recording growth of mere 10.22 per cent.
There were several multibagger stocks which outperformed the market during the period. Considering the stocks bearing market capitalisation of more than ₹5,000 crore, on an overall basis the top two gaining stocks were Brightcom Group and National Standard (India) which soared beyond 2,000 per cent and 1,500 per cent, respectively, from Budget 2021 to Budget 2022. From the penny stocks list, there were only five stocks which included Brightcom Group, Reliance Power, Jaiprakash Power Ventures, Shree Renuka Sugars and Suzlon Energy which gave handsome returns to the investors since the budget of 2021. The top 10 multibagger stocks from the BSE Small-Cap index depicted returns rallying from around 480 per cent to over 2,500 per cent whereas those from the BSE Mid-Cap index rallied from 89 per cent to 329 per cent.
“The reason why the market is in a bit of a pickle right now is on account of the fear that the government is focusing too much on growth and not enough on inflation and therefore the bond markets are reacting accordingly as well. Also, the budget is good except from a bond market perspective and the bond market probably needs to be assuaged in some way so that the government will be able to borrow easily,”opines Shankar Sharma, Co-Founder, First Global.
Anirudha Taparia, Joint CEO, IIFL Wealth
"Today, as we stand in the aftermath of the pandemic, what we need are the right booster shots to get the growth flywheel moving while concentrating on human capital augmentation and adequate social sector and healthcare spending. The Union Budget has delivered on all these fronts."
Outlook : Providing a broad-spectrum booster shot to the economy, Union Budget 2022-23 is progressive, especially with its emphasis on building the infrastructure of the country. The Finance Minister clearly emphasised the top priorities of the government – PM Gati Shakti for sustainable growth, inclusive development, productivity enhancement and financing of investments. Coming to the impact of the Union Budget on the capital markets, the effect of the budget on the market course can fade in a couple of days’ time. The domestic markets typically feel relieved post-budget as no bad news is deemed to be good news. However, the macro issues and the micro performance are likely to come into the picture soon as even as the Q3 results season can be analysed to be softer than expected. Another key trigger for market direction beyond the next few days can be the technical factor of fund flows from foreign portfolio investments (FPIs). In a situation where FPIs are in a cooperative mood, the equity markets are likely to witness buying interest over time while in the absence of such mood, a correction may be in store post a couple of weeks when the negative triggers may come into action. The positive on the Union Budget 2022, is that it is transparent and indicates that the economy is headed for growth, which is predicted to kick-start a virtuous cycle of higher spending, increased private investment, additional employment and elevated revenues for the government.