The government has cleared the seventh pay commission that has given a hike of around 20-25 per cent across various segments for government employees. The pay commission hike will be applicable to 1.75 crore government employees. The government seems to have provisioned for the recommendations in the Union Budget of 2016-17 and hence, from a fiscal perspective it should not strain the balance sheet of the government significantly.
Surplus money in the hands of people would lead to an increase in consumption spends. The multiplier effects of higher income in the hands of the consumer would also get reflected with improved GDP growth over a period. The pay commission hikes combined with a good monsoon could help boost the consumption demand in the economy and hence would positively impact sectors that are directly or indirectly influenced by the same. As per estimates, the GDP of the country could improve by almost 1 per cent backed by improvement in the consumption demand. Even though the hike in salaries, this time, have been lesser than in the previous pay revisions but we do not see this as a major impediment as we are coming out of a weak consumption demand and a low base of last year, the year-on-year growth could still be significant.
On a sectoral basis, empirical evidence suggests that discretionary consumption growth sees an uptick owing to increased spending capability of the consumers. This uptick gets reflected in the higher demand for housing and allied sectors, consumer durables and auto. Moreover, ancillary industries like auto ancillary, cement and finance companies that cater to the consumption-driven sectors could also see benefit from the spill over demand.
For the frontline index like Sensex, the consumer discretionary sector accounts for around 11-12 per cent weight and hence the direct impact on the earnings of frontline indices might be low – although in the broader market there would be a lot of auto companies, ceramics, cement, consumer durables companies that could stand to benefit. Hence, the market may not move significantly only on the back of the pay commission demand, and the positives would unfold in specific, idiosyncratic opportunities.
Some of the stock specific ideas that we believe could benefit from this move would be:
Hero MotoCorp – It would benefit from improvement in rural demand and increase in auto spends.
Maruti Suzuki: Maruti, in the auto space, would also benefit from new launches and betterment in the overall sentiment.
La Opala that is present in kitchenware would stand to benefit from spill over demand from discretionary and household spend.
Among cement players, North based players like JK Cement that have seen improvement in pricing and would see demand recovery in the housing sector could benefit.
It will be interesting to see how the situation pans out. A lot still depends on the monsoon, passage of critical bills in parliament and also global oil prices. If either of these factors remain unfavourable, it could lead to roadblocks to growth.
(The author is fund manager at Centrum Broking)