Surprise rate cut by Reserve Bank of India (RBI) coupled with additional liquidity announcement from ECB have led to excellent gains in the market. With reduction in policy rates, focus is now on government action on reforms and fiscal consolidation. Expected announcements in the Union Budget as well as action on recently passed ordinances would be closely watched out for in the near term. Currently, valuations of benchmarks at 15x one-year forward consensus earnings (FY17) are near the long term average. Industrial recovery and improvement in profitability of companies, on the back of further fiscal initiatives, are the likely triggers for further re-rating. We would thus recommend a positive stance on domestic infrastructure and interest-rate sensitive sectors with medium to long term perspective. Our preference stays for companies having strong balance sheets and ethical managements. We are also positive on select export-oriented stocks, due to strength in the US economy. Key risks to our recommendation would come from geopolitical concerns globally, decline in foreign inflows, sharp currency movements and spike in oil prices.
Eyes on budget
Over the next few days, market focus will shift to the budget. As highlighted in our last month’s report, lower-than-expected tax collections and divestments are expected to result in a revenue shortfall for the fiscal. While the sharp fall in crude has provided a breather in terms of lower subsidies, the Government will have to make additional efforts to meet the budget FD target. There may be cuts in the plan expenditure targets for the current fiscal. For the upcoming budget, the key would to be to kick-start the investment cycle while staying on the path of fiscal consolidation.
We expect government to focus on the following points in the upcoming budget:
a) Focus on Make in India initiatives
We opine that, the Government will try to support the ‘Make in India’ initiative in order to boost domestic production, increase employment and reduce imports. Direct tax exemptions for first three years of operations for MSMEs, time bound tax sops through excise holiday for railways, easier tax rules for shipping and income tax benefit for electronic equipment manufactures etc are all being talked about. Sectors like shipping, capital goods, defence manufacturing, automobiles, food processing, renewable energy etc may benefit from the same.
b) Focus on infrastructure and smart cities development
We expect government to boost the investment towards infrastructure sector such as highways, roads, bridges, ports, airports in order to offset the private sector’s inability to finance this infrastructure. Along with this, further investments on smart cities development as well as river interlinking are also expected from the government in this budget.
c) Rationalization of subsidies
Fall in brent crude prices, coupled with diesel price deregulation and initiation of Direct Benefit Transfer (DBT) has resulted in reducing the subsidy burden for the Government. However, Government may announce reforms relating to the subsidies on Kerosene / LPG, thereby further promoting fiscal consolidation.
d) Boosting revenue collection
We believe that, as compared to the RE for FY2014-15, the tax collection growth targets may be set higher, in line with the higher targeted growth for 2015-16. As per the mid-year economic review, the shortfall in tax revenues has been pegged at Rs.1.05trn for the current fiscal. We also expect the Finance Minister to aggressively pursue divestments in FY16, to raise additional revenues to finance its plan expenditure. The FM will also likely budget for stake sale in Balco / HZL as well as some holdings in SUUTI, apart from sales of some land holdings etc.
By Dipen Shah, Head- Private Client Group Research, Kotak Securities