By Rusmik Oza
Indian Union Budget 2021-22: As we near the budget 2021, the implied vols will remain high which means higher volatility in the market. The NSE Volatility Index has risen from 18% in Mid December to 23% as of now. We expect Nifty-50 to range between 14,000 and 15,000 till budget and any break-out or break-down from this range could be seen post budget. On the higher side, Nifty can go up another 5-7% at best on the back of a very good budget and an upward revision in earnings led by Q3 results. In case budget disappoints then Nifty-50 can break 14,000 and go to 13,000 which is a major break-out support area. We are not expecting any major crash in the market at this moment as the earnings print is coming strong which could provide a cushion on the downside.
As Nifty-50 has rallied more than 90% from the Mar’20 lows, a 10-12% correction, if it comes, could be healthy for the market. Nifty-50 is trading at 23x on one-year Fw PE which factors in most part of the healthy earnings growth likely to come in FY22E. Valuations are stretched by any standard and investors need to be cautious. It is better to avoid riskier bets at this juncture and book profit part profit in Nifty-50 goes closer to 15,000 mark. Risk-averse investors can also look to protect their portfolios by buying PUTs of either Feb/March if Nifty-50 goes near 15,000.
Budget 2021 Expectations
This year the normal euphoria of the budget is missing thanks to the already sharp run-up in the market and series of reforms and announcements that have already come from the government in the last six months. The Union budget will seek to promote the two key growth engines, viz. social and physical infrastructure while being mindful of the limited fiscal space. We expect the budget to focus on AtmaNirbhar Bharat Vision, health, physical infrastructure, and financial sector along with rural India. We do not expect any major changes in taxes. However, we do not rule out measures/incentives related to housing and health. There are reports about a Covid cess though it is unlikely to yield much unless rolled out to most of the taxpayers (individuals & corporates). On the indirect tax front, the government may increase customs duties on finished/semi-finished products in the PLI related sectors.
For budget numbers we assume Nominal GDP growth to be 13.8% in FY22. On the revenue front in FY22, we estimate gross tax revenue growth at 20%, non-tax revenues at Rs2.6 lakh cr and divestments at Rs 1.5 lakh crore. We expect budget corporate taxes to grow 25%, personal income tax to go up by 15% and indirect taxes to go up by 20% in FY22. On the expense front in FY22, we assume overall expenditure growth at 7% (revenue expenditure growth at 6% and capital expenditure growth at 12%). On Fiscal Deficit we expect the government to end FY21E with a Gross Fiscal Deficit/GDP (GFD/GDP) of 7.1% with consolidated GFD/GDP at 11.9%. For FY22 we model GFD/GDP to come down to 5.5% mainly on the back of strong nominal GDP growth. We expect FY22 gross market borrowing to be marginally lower at around Rs.10.7 lakh cr against Rs.12 lakh cr in FY21.
Our expectation is that rates should harden across the curve in FY22 and on this basis we expect the 10-year bond yield to move towards 6.25- 6.75% in FY22.
(Rusmik Oza is Executive Vice President, Head of Fundamental Research at Kotak Securities Ltd. Views expressed are the author’s own.)