Markets love events. And the Budget is one big event which it awaits with bated breath every year, with the momentum picking up during the last one month or so. In earlier years, much speculation used to precede the actual event as investors and speculators alike tried to second guess the finance minister’s moves. And in the process earn quick profits.
Speculators have a jolly good time trying to spread rumours and settle their outstanding moves ahead of the actual event. Earlier, with the railway budget, this canvas for speculation was even broader as freight rates and passenger rate hikes are two more factors which lend themselves to second guessing by market players.
This time, however, the finance minister played with a straight bat. No haphazard changes, no additional taxes nor the exemptions which every sector hopes to receive. This completely stunned the market as the budget was a continuation of the previous budget and a focus on growth remained the central theme. Even ITC, the favoured boy in the industry which is looked on as the barometer for tax rise, was spared.
The relief was unmistakable and the markets reacted the way they should – giving a thumbs up to the FM. The spring back was like, well, a spring bouncing back with tremendous force after the pressure built over weeks was suddenly released. The Sensex moved up by nearly 850 points to close the day at 58,862. The next day was more of a technical correction as people rushed to square off their sales on being proven wrong and the spring bounced up even further as the Sensex gained another 700 points.
In subsequent days the pressure reduced and the spring was back to its normal state. The budget event was over and the market was trying to second guess other events – the RBI and thereafter the results of the elections in the some of the key states, including Uttar Pradesh.
Most experts to whom Business India spoke were quite enthused about the budget. “This is a landmark budget,” says Gopal Jain, co-founder and MD of Gaja Capital, an India-focussed private equity fund. “The FM could have allowed a fiscal deficit of 9 per cent during the second pandemic year. However, the government resisted the temptation and has laid the foundation to rein in fiscal deficit. In earlier years, very few FMs have done this. Yashwant Sinha had laid a similar foundation for growth in 2003-08. A tight fiscal policy will compensate for the liberal monetary policy followed by the RBI.”
Conservative path
Many countries have continued with liberal policies and allowed the fiscal deficit to remain at elevated levels in the second year of the pandemic. The average fiscal deficit of companies had gone up to 11.7 in 2020 for advanced economies and 10.7 per cent for emerging economies, according to IMF (April 2021). India has, however, decided to follow a more conservative path.
“The budget is a continuation of last year’s budget,” says Rahul Singh, CIO (equity), Tata Mutual Fund. “It is quite consistent, with no negative surprises. Nor were funds earmarked on social schemes ahead of the elections in some key states. It is a capital investment-oriented budget and while one may debate on whether it is 35 per cent growth over last year or not, the numbers are conservative and realistic, in my opinion.”
However, the thumbs up by the market was not just based on a relief rally, which was one of the views expressed in the market. There were other, notable elements. “This is a progressive, bold and forward-looking budget despite the low spice element,” says Ahmad Azeem, head PMS, LIC Mutual Fund Asset Management Ltd. (PMS). “By continuing to focus on growth, the government has sent a clear signal that it is not too enamoured of keeping fiscal deficit too low as this may impede the capex impetus. The growth stimulus is visible in the capex investments it plans. This is in continuation of what it had started with the PLI scheme. While the benefits may only be felt two-three years down the line, I feel this is a bold step. Especially since it is ahead of important state elections, as a result of which the government could have opted for populist benefits.”
Multiplier impact
The capex commitment, which has been substantially enhanced, is likely to have a good multiplier impact as well as be beneficial to cement, steel, aluminium and construction companies, amongst others. Cement shares, including UltraTech, Ambuja Cement, ACC, Dalmia Cement and Shree Cement, all surged on the day of the budget. Metals were also up for the added reason that despite global inflation, the cost of mining does not immediately rise in tandem with the price.
Tata Steel, JSW, Hindalco, JSPL, NMDC, GMDC, Hindustan Zinc and Vedanta all took the fancy of investors. Tata Steel’s excellent results were declared, which also helped. The company’s EPS for the 9 months ended December 2021 on a standalone basis was Rs205 as against Rs145 earned for the full year. With overseas operations also registering good growth, the EPS for 9 months at Rs252 was 4x the PAT earned in FY21. Hindalco, which is on a tear post the completion of its takeover deal of Aleris by its subsidiary Novelis in 2020 crossed Rs500 on budget day. Proxy shares for infrastructure, Larsen & Toubro, also gained traction on budget day. A healthy construction sector augurs well for the economy as it is an industry which gives employment to nearly 10 per cent of labour.
Nimesh Shah, MD and CEO, ICICI Prudential MF, explains: “Given that India has one of largest working age populations, job creation is of paramount importance. One of the ways to address this is through Government’s intervention in the form of infrastructure development. This tends to have a long-term multiplier effect on the economy which will be reflected in GDP numbers as well, but with a lag. The capex done by the Government in the form of infrastructure development helps create new jobs, stokes demand for goods and services due to rise in income, which in turn leads to private capex creating further jobs. As a result, it creates a virtuous cycle.”
One major reason for the feel-good factor was the hope of good earnings results during this season. Says Azeem: “The government’s strong investment plan will inspire more private investments. Banks have already cleaned up much of their NPAs and are ready with the perfect launchpad for capex to take off to the next level.”
The pick-up in infra demand on the back of government spending and good opportunities for banks, which have again been nursed to health, saw PSU banks coming back on the radar of investors. The huge spend on housing earmarked in the budget will also see good business for banks and NBFCs with more borrowers queuing to tap funds.
In anticipation of good results, Bankex outshone the Sensex in January. Since 1 January, while the Sensex has given 1 per cent returns, Bankex has given 7 per cent returns. PSUs which have reported mixed results, were however, up, giving the highest returns of 8 per cent during the month. IT, despite good results was down and in negative territory.
The government’s proposal to set up funds for start-ups and allow private companies to manage went down well with private equity companies. Gopal Jain says: “The move to sponsor thematic fund of funds for VC/PE to be managed by the private sector is another bold step. The fund of funds will see the government coming in as an anchor investor committing capital for investments in funds investing in sunrise sectors. Rs10,000 crore invested in this scheme can generate investments to the tune of Rs5 lakh crore once credible institutions like ICICI and HDFC also come in as managers.
Risk averse retail investors will also be able to invest in such funds. This will allow onshoring the offshore, as more private equity can be set up in India as AIF funds being allowed by SEBI. I sincerely hope the government invests Rs10,000 crore and more on a periodic basis for the next four-five years. The growth in the private equity asset management industry will also see a similar rise like the AUM of the Indian mutual fund industry which has seen a 6x growth in the last 10 years to nearly Rs38 lakh crore.”
Will the good EPS and feel-good factor translate into good returns on the stock market? Says Rahul Singh “I am positive for the long term as far as stock markets are concerned. Corporates have deleveraged their balance sheets and are generating good cash flows, banks have become more healthy and private equity funds are available. More important, risk appetite is present. Markets will witness a tussle between good economics and good earnings. The third factor which will play a crucial role is interest rates. I feel one can expect modest gains from the markets in 2022.”
Taxing digital assets
This is one factor which was debated a lot before the announcement concerned the crypto currency. The FM did take note of it and said that digital rupees would be introduced by RBI soon. Introducing a digital currency which is well recognised across India and has the trust of millions is indeed a good step as the trust factor in the rupee would be much higher than crypto currencies, especially with RBI keeping records. While details will be announced shortly by RBI during its credit policy later in February, the FM took a good decision of taxing digital assets (crypto currency).
Ahmad says: “Taxing digital assets is also a very good step. As is the disallowance of claiming set-offs against losses. Countries like China and Russia have been unsuccessful in banning crypto assets.”
While the market may take some time to absorb the finer points of the budget, one view is that Indian markets will continue to give double-digit returns despite the relatively longer time for capex projects to deliver returns. Food inflation will come down sooner rather than later and the fears about rising crude oil stoking inflation may not really be so bad. Government can further reduce excise, even if it is a token cut on petrol and diesel, to neutralise it.
Given the rising GST collections it can afford to send a positive signal to markets that it is seriously focussing on growth. The growth in the auto industry, which had been hampered due to the shortage of semiconductors, will only increase GST collections and in good months could even cross Rs1.50 lakh crore. The rising price of crude in January has, however, been beneficial to certain industries like sugar, which will start manufacturing more ethanol (see box). While the prices of ethanol are fixed for the year, markets have a way of looking at the future and factoring in several global factors too. Year 2021 has seen the rise in desi investors who are undaunted by temporary problems.
The fact is that despite FIIs being net sellers in equities, having sold nearly Rs1.45 lakh crore in the last five months, the markets have managed to stay steady. If the government does indeed manage to come out with the LIC issue before March, the markets will get a further boost, especially as LIC will easily command a market valuation which may be close to Rs18 lakh crore post its IPO.
The success of LIC will again catalyse the markets and see FIIs return to India. It will be best to stay invested till then. The Sensex movement is good for sentiments but the real feel-good factor is to see how one’s own portfolio appreciated/depreciated during the Covid period and take corrective steps to rectify it. For passive investors, it is best to stay invested and look at sector rotation at play. Budget is, after all, but one event, albeit an important one but it has taken place.
So sweet!
Budget gives further impetus to the sugar industry
The rising crude oil cost has come as a boon for the sugar industry. The rationale is that ethanol, which is used as an additive in Indian fuel, will get a boost. Brazil and India are the two largest sugar producing nations. In Brazil, flexi-car owners have the option of choosing between sugar cane-produced ethanol and gasoline, in any proportion. Both are also 100 per cent switchable. The residual bagasse is used to produce power. If the price of fuel goes up, ethanol production in Brazil tends to go up and as a result, exports from Brazil come down significantly leading to a firming up of prices in the global market. This, is turn, translates to better export opportunities for sugar companies in India.
Realising the economies of the cane industry, the FM in the current budget, has sought to encourage the use of blended fuel. The blending of fuels with a tax proposed to be levied on non-blended fuel has come as a sweetener for the sugar industry. The government has earmarked a sum of Rs300 crore for extending support to sugar mills to set up ethanol plants. This is over and above the revised budget of Rs160 crore set for 2021-22.
The proposal to encourage blended fuels saw a sharp rise across the board for the sugar industry. Almost all sugar producing stocks have seen this as a smart move. Triveni Engineering, DCM Shriram, Dalmia Bharat Sugar, Oudh Sugar, Balrampur Chini, Shree Renuka Sugars, Dwarikesh Sugar were amongst some of the stocks targeted by investors. Dhampur Sugar, Andhra Sugar, Dwarikesh and Triveni Engineering made a 52-week high on 4th February. The former aided by very good quarterly results. Balrampur Chini made a 52-week high on 21 January. “We are on the cusp of a change, from being seen as a commodity industry to an energy industry,” says Vijay Banka, MD, Dwarikesh Sugar Industries.
Over the last few years several sugar companies have been investing heavily in setting up ethanol plants. Besides sugar, food waste is also being used for the generation of energy, along with bagasse. Banka feels that companies will be manufacturing both ethanol and power, besides sugar, which will allow them to shed off the label of commodity companies.