Finance Minister Nirmala Sitharaman presented a robust Union Budget on July 23, emphasising policy continuity. In a recent note, brokerage house Emkay noted that the fiscal consolidation path remains on track, and the focus on capital expenditure over revenue expenditure is sustained. Despite a small hike in capital gains tax, which it believes is not material, the budget holds firm on key economic priorities.
However, the brokerage has maintained its cautious stance on the market due to current high valuations, which make it susceptible to short-term corrections. Emkay's preferred sectors include FMCG, IT, and Durables. Conversely, it holds a negative outlook on Industrials and Financials.
"We remain cautious on the markets. A good budget is in the price and unlikely to move the needle significantly. On the other hand, we are looking at a tepid earnings season, as topline growth remains moderate and margin tailwinds are petering out. Also, rate cuts are at least 1-2 quarters away. On the other hand, valuations are stretched at 21.4 (1YF P/E of Nifty), with no imminent upgrades. We maintain our preference for IT/FMCG/Durables over Industrials/Financials. There are no changes to our model portfolio, top SMID picks, or key avoids," said Emkay.
Its Model Portfolio consists of 19 stocks. The highest weightage in Emkay's portfolio is of Reliance Industries at 10 percent, followed by UltraTech Cement at 9.5 percent and TCS at 8.5 percent. Meanwhile, Bharti Airtel, Hindustan Unilever, Hero MotoCorp, and Shree Cement have 6 percent weightage each.
Other stocks including Tata Motors, TVS Motor, Maruti Suzuki, Dabur India, Nestle India, Shriram Finance, IndusInd Bank, Axis Bank, ICICI Prudential Life, Infosys, Wipro, and Interglobe Aviation have up to 5 percent weightage each.
Meanwhile, its top SMID picks include Suprajit Engineering, Jubilant Foodworks, Honasa Consumer, Senco Gold and Metropolis Healthcare.
On the contrary, the brokerage's top avoids are - HDFC Bank, SBI Cards, PI Industries, Eicher Motors, and L&T Tech.
Emkay noted that the Union Budget 2024 maintained policy continuity with key measures ensuring fiscal stability. The fiscal deficit ended lower than interim budget estimates at 4.9% of GDP compared to the expected 5.1%. Additionally, there is a continued focus on capital expenditure with a 17% year-on-year growth. However, it cautioned that concerns that the electoral setback in June would lead to a shift towards consumption stimulus were largely unfounded. Financial stability has been a significant driver of the current growth phase and bull-run, marking this budget as a positive step, it added.
The brokerage underscored two minor yet positive changes in the budget approach that are noteworthy. Firstly, the direct stimulus to employment, particularly targeting employers, is expected to marginally boost hiring. This could benefit sectors such as retail, NBFCs, and MFIs that are in growth mode. Secondly, half of the windfall gain from the RBI dividend was allocated to revenue expenditure, with a significant portion transferred to states. These measures address the K-shaped post-Covid recovery and reinforce positive stance on FMCG and two-wheelers, it stated.
The increase in capital gains tax is marginal and not a major concern. The tax on buybacks could slightly impact payouts and, at the margin, affect return ratios and valuations of some high-cash generators. However, many companies may not alter their behavior significantly. The increase in STT on derivatives is also minor. Overall, the rise in taxes on capital markets is not severe and is unlikely to materially impact market valuations, Emkay observed.
The Union Budget 2024 has had a marginal incremental impact on most sectors but presents clear positives for some. According to Emkay, the jewellery sector benefits significantly from the cut in gold import duties, while battery players gain from lower import duties on critical metals, enhancing their competitive edge and reducing production costs. Cement and building material companies stand to see increased demand due to continued housing stimulus from PMAY Urban 2.0 and a focus on highways and city development, it further stated.
On the downside, capital market participants are affected by the capital gains tax (CGT) and securities transaction tax (STT), though the impact is negligible. The market saw a relief rally in some stocks, as expectations of more severe measures, particularly on derivatives trading, were not met. Overall, the budget maintains stability, with the jewellery and battery sectors emerging as clear winners, while the effects on capital market participants remain minimal, noted Emkay.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
