In our special research report Explosive returns Portfolio 2.0 – Stocks to own under Modi 2.0 we had written that many analysts who are speculating big bang reforms are up for disappointment. The government has limited fiscal bandwidth. It can’t fill the gap of lower corporate capex.
We are of opinion that reforms from past 5 years will see its ripple effects in company’s earnings. GST roll-out, Ayushman Bharat, Aawas Yojana, MSP increase, DBT transfer, etc are major reforms that are yet to show results. Implementation of the same till they reach every beneficiary will be lead to better outcome overall.
Key highlights from the budget 2019 & our view:
- Subvention to MSMEs & Loans upto 1 Cr in 59 mins: This was rolled out for formalization of MSME by getting them on GST platform. Higher Cost of doing business will be partially offset by the subvention. Positive for banks and companies with smaller sized vendors.
- Jal Jiwan Mission: Drinking water for all rural households. Positive for infra companies into water treatment and piping.
- Low tax rate for firms with turnover upto 400 Cr.
- Tax deductions of additional Rs. 1.5 Lakh for house less than Rs. 45 Lakh. Big positive for housing finance nbfcs, realty and overall employment.
- Tax deduction of Rs. 1.5 Lakh on interest for EVs. Positive for Autos as there will reasonable volumes for EVs to kickstart manufacturing as auto companies need scale to invest in any new product. (No GST cut for commuter segment 2 wheelers)
- Increase in custom duty on gold; not very negative for jewellery companies as most of the gold purchases happen for occasions.
- Increase in income tax for employees with salary 2Cr-5Cr and 5Cr+.
- Increase in Divestment plan: This will keep PSU stock prices under check. Government has identified a new structure wherein it will consider even other PSUs, eg. LIC, holding stake as quasi Govt stake. This opens up more room for divestment as the government can take its own stake below 51% even if it is a strategically important PSU. This led to sell off in PSU stocks as more stocks will be dumped in the market by the government. We believe this can be seen as an opportunity by a long term investor as the stock will be available cheap. Valuations keep on rising with growth in underlying business, special situations like these unrelated to underlying business create opportunities for long term investors.
- Increase in effective STCG and LTCG for FIIs: This will increase tax burden on FIIs who were investing in India at relatively favourable terms until last year. This led to sell off in overall market post budget.
- Suggestion by FM to increase public shareholding upto 35%: This has led to some panic selling in stocks that have more than 65% promoter shareholding. If this happens, it would be more on milestone basis and we don’t believe it is hard to find buyers for these blocks in quality companies. If there is a sell off due to this reason, it is an opportunity to accumulate good quality companies. Valuations keep on rising with growth in underlying business, special situations like these unrelated to underlying business create opportunities for long term investors.
- Including CPSE in ELSS basket: This would increase demand for stake sold by the government.
- Increase in infra & defence expenditure: Although there is decline as a % of GDP, it is a healthy growth in absolute terms for both the sectors. This is positive for infrastructure and related stocks.
- Infusing liquidity in NBFCs from Banks: Banks are asked to take over NBFC assets which will provide liquidity to NBFCs to remain solvent. Positive for NBFCs with relatively good quality portfolio. Good quality nbfcs are not facing liquidity issues anyways.
Overall, we believe that Budget 2019-20 was not a blockbuster budget however, after considering offers in interim budget 2019-20 it was an attempt from the government bring back stability in most stressed pockets like rural economy and NBFCs. Given the current slowdown situation, this budget didn’t address the crisis at hand. It needs to be seen what happens in next 2 quarters until next budget.
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