High expectations belie government’s cautious mood

Maiden Union Budget from the NDA Govrnment

The Union Budget is due to be announced on July 10. After the landslide victory of the NDA, expectations are riding high and at the time of writing this article, the market is trading at an all-time high with momentum still looking strong for a target of 7900-8000 by the time the Budget is announced. Following are the scheme of events in the prelude to the budget:

  • Hopes are sky high
  • Recent hawkish comments from the PM
  • FM hinting at possible strong measures to keep the fiscal deficit under control
  • Kick starting of investment in infrastructure, which will have a positive chain effect on other industries such as metals, cement, and capital goods

 

In terms of expectations, following announcements could be on the agenda of the FM:

 

1) Fillip to infrastructure funding

 

The focus on infrastructure could possibly lead to some concessions to lenders to this space such as the banks and financial institutions. Concessions to banks could be in the form of relaxation in CRR, SLR requirements, which could lead to higher lending avenues as well as increase in availability of funds. Financial institutions could be allowed to issue tax-free bonds, specially targeted towards infrastructure.

 

Stocks in focusIDFC

 

IDFC, the new banking license holder could be a huge beneficiary, since it is already existing presence in infrastructure could be a distinct advantage. We strongly recommend accumulation of the scrip for long-term gains.

 

2) Increased tax concessions for housing

 

Some increase in concessions for investment in housing could be on the cards, which could indirectly boost investment into the housing sector. This has been languishing for long period now. This will also provide a good boost to the cement and steel sectors, which have been going through some demand stagnation.

 

Stocks in focus – HDFC, LIC Hsg Finance, Ramco Cement, JK Lakshmi and JK Cement

 

Preferred pick will be LIC Hsg Finance, Ramco Cement, and JK Cement  

 

 

 

3) Indigenisation in defense manufacture

 

There is an urgent clamour for increasing India’s defense budget, currently around $35 bn, which pales in comparison with our neighbor China that has a budget of $130 bn. With a tight fiscal situation, any compromise in this area is unlikely, which could possibly encourage the government to announce incentives to local industries for indegenisation.

 

Stocks in focus – BEML, BEL, M&M, Rolta, and Taneja Aerospace

 

Preferred pick will be M&M

 

4) Boost to distribution and transmission of power

The NDA government feels that the power crisis can be solved largely by modernising T&D (transmission and distribution) infrastructure, feeder segregation, metering consumption, and harnessing the renewable energy potential. These few strong reform measures, which the government is expected to announce, would help revive this sector. Since the coal sector also falls under the ambit of the power minister, the bottleneck of allocation of coal for power generation is sought to be resolved.

 

Stocks in focus – Jyoti Structure, Kalpataru Transmission, REC, PFC, NTPC, and Tata Power

 

All could be considered our preferred picks          

 

5) Increase in excise on cigarette, FMCG goods

 

The market is already factoring an excise hike on cigarettes, which has seen stocks such as ITC under pressure. With increased focus on increasing revenue, the hike could possibly extend to other products in the FMCG category selectively, which could see some pressure on some of the FMCG goods.

 

Stocks in focus – ITC and Hind Unilever

 

Near-term caution advised. Any sharp declines by 10-15% will be a great opportunity to enter into the stocks

 

6) Oil sector reforms

 

The oil subsidy burden is a great cause for concern for the government. In view of the impact of the same on the fiscal deficit, some bold measures could be on cards. Gradual decontrol of LPG could happen on similar lines of diesel, which might receive acceptance. All these measures should substantially improve the financial health of oil marketing companies. Simultaneously, they should reduce subsidy burden on ONGC and Oil India.

 

Stocks in focus – BPCL, HPCL, IOC, and ONGC

 

Preferred pick will be BPCL

 

Overall, the budget could again give some near-term pain and long-term gain, which is the message from statements emanating from the PM and FM. The market has already run up substantially in the past 4-5 months and some near-term caution would be advisable. At same time, focus on quality stocks could be on the accumulation list.

Written By:

Equity Research Desk

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

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