Analyst Notes: (04/02/2021)

This is a thematic portfolio of Budget beneficiaires. These companies may or may not be part of our coverage/process. We will recommend two good companies from this list separately for long term buy as per our process.

Bulk of your portfolio 60-70% must be in Core stocks and 30-40% in Booster and Thematic (High Risk). We recommend cautious approach in thematic portfolio as it may or may not deliver expected outcome of consistent returns versus Core portfolio. At the same time, it can generate exponential returns when it delivers.

We recommend to invest in adjoining basket of companies in a Staggered manner. They might have run up post-budget but they will cool off ~10-15% over time.

We are publishing this report in Theme Investing Format so that you will be able to execute buy orders on regular basis (Over next 2-3 quarters). Do not exceed 10% of portfolio in each theme. You can de-select companies if you already own it.

(More info on individual companies will published in a week)

Budget 2021-22: Budget like never before in last 6 years

Every crisis forces the government’s hand to put the economy back on its feet. This year’s budget following the pandemic crisis was nothing short of it.

On February 1^st 2021, Hon. Finance Minister Nirmala Sitharaman presented Budget 2021-22. On the face of it, nothing negative (on taxation) was good news for the stock market.

The commitment of the government to revive the economy is seen by budgeted estimate of 6.8% fiscal deficit in FY22. This follows 9.5% fiscal deficit seen for the year FY21. It could have been worse if the government were to increase taxes and to keep a check on fiscal deficit.

Not just that, the glide path for fiscal deficit also indicates strong expansionary policy for few years, with fiscal deficit going below 4.5% only in FY26. This was a pleasant surprise for the markets with Nifty closing 4.75% higher for the day.

The NK Singh committee - constituted by the Narendra Modi government - recommended a fiscal glide path for the government that would have gradually brought down the fiscal deficit to 3 percent of GDP by the end of FY20 and further reduced it 2.5 percent by FY23.Now with Covid slowdown hitting the country, the government changed its stance to grow the economy through investments.

Key numbers from the budget speech:

• Budget expenditures for FY21-22 at ~Rs 34L Cr, its flat versus previous year but on a high base. (Budgeted Ex for 20-21 Rs 27L Cr vs Actual Rs 34L Cr)
• Capital expenditures increased to Rs 5.54L Cr vs Rs 4.1L Cr in previous year (+35%).
• PLI schemes to make India manufacturing exporter worth Rs 1.97L crore over next 5 years.
• Rs 1.1L Cr each for Roads and Railways, both investments for new infrastructure.
• No changes in direct tax rate, personal or corporate.
• Rs 3L Cr towards discoms for modernization and infrastructure.
• Divestment worth Rs 1.74L Cr from privatization of government owned companies.
• Development Finance Institution with Rs 20k Cr capital set up for raising Infra funds
• Rs 20k Cr for PSU Bank recapitalization

Category wise budget announcements (For investors):

Healthcare:

• 137% increase in Health and Well being including healthcare spend to Rs 2.3L Cr. This includes Covid Vaccine worth Rs 35k Cr and water sanitation.
• This is positive for availing healthcare and reduces out of pocket expenses of lower income category.
• Water Sanitation companies and healthcare/Pharma will benefit from increase awareness of health and diagnosis.

Infrastructure:

• Government has already announced projects worth Rs 10L Cr during 2019. Out of which, Rs. 1.1L Cr are completed. Government will set up development finance company to raise funds for future infrastructure projects.
• Large spends on Dedicated Freight Corridor (DFC). Western DFC (Delhi to JNPT) to become operational in Jun-22 and Eastern DFC (Delhi to Howrah). DFC is high speed freight only rail track for timely and cost-effective transport. It connects Ports with the hinterland for goods transportation. It will save time and resources thereby adding to productivity of the economy.
• Investment in City Gas and Gas pipeline to increase share of Gas in overall fuel consumption.

Textiles and Manufacturing:

• Existing announcement of new manufacturing plants attracting 15% in income tax. In addition to it, PLI scheme is announced for exports to provide performance-based incentives.
• Manufacturing companies have large potential from western countries moving away from China to de-risk dependency on single country.
• Alongwith PLI for textile exporters, textile parks will be set up dedicated for exports. Textile industry provides large employment generation. Export oriented textiles are beneficiaries.

Automobile:

• Scrappage policy for Commercial Vehicles and Passenger Vehicles and purchases of buses for government organizations.

Financial System:

• Recapitalization of PSU Banks and transfer of bad loans to ARC (Bad Bank to free up stress on PSU Bank balance sheets). Privatization of 2 public sector banks and 1 general insurance company. This will follow privatization of BPCL, ConCOR, BEML and others.
• Budget also highlighted fund raising via monetization of existing infrastructure assets like NHAI, Grids and Gas pipeline.
• Introduction of InvITs, with provisions to encourage FII to invest in India’s infrastructure.

In a nutshell, it was an opportunistic budget to kick start economic cycle at a time when even global economies are running large deficits. Bond investors may get more cautious looking at increasing glide path for fiscal deficit but it certainly is one leg up for equity markets in long term.

What are some big ideas for next 5 years?

Over next 5 years, we believe that the focus of the market will shift to sectors like Manufacturing (Domestic and Exports), Infrastructure and Capital Goods. We had anticipated it in the year FY19-20, but looks like it’s coming true now, better late than never.

1. Two types of companies worth participating, i) contractors to other private infrastructure companies (Capital goods, Contract mfg or EPC contractors) and ii) asset owners expanding assets into new geographies (Generators, distributors, Pipelines, Ports, etc.)
2. Ancillary companies supplying to infrastructure companies will benefit from capacity expansion in infrastructure. Eg. Rail Bearings, Cement, Industrial Paints, Refractories, Abrasives, etc.
3. Banking sector is another beneficiary whose growth is directly correlated to capex in the country.

Themes: Consumption | Digital India | Arogya India | Budget 2021-22 | Currency Sensitive | Financialization | Grameen Bharat | Growth |  Infrastructure | Leisure India | Transportation and Logistics