Sneha Poddar, VP of research, broking and distribution at Motilal Oswal Financial Services (MOFSL), believes the government will continue with its tax and non-debt capital receipt projections presented during the Interim Budget in Feb’24 and stick to its fiscal deficit consolidation path. She also expects the government to offer more incentives to the taxpayers to shift to the new tax regime and expand on housing schemes or various other schemes. In an interview with Mint, Poddar also discussed Nifty valuations and defence, railways, and PSU sectors.
The upcoming Union Budget will outline the priorities of the new coalition government for the next five years.
We largely expect the government to continue with its tax and non-debt capital receipt (including disinvestment) projections presented during the Interim Budget in Feb’24 and stick to its fiscal deficit consolidation path.
We, however, believe it can increase fiscal spending given higher receipts of RBI dividends.
The government might provide more capex-related loans to states and increase the instalments under PM-KISAN by 50 per cent.
It may also offer more incentives to the taxpayers to shift to the new tax regime and expand on housing schemes or various other schemes.
The government might strategically utilize the extra windfall from the RBI dividend to provide relief to the poorer and middle classes and to encourage consumption ahead of the key state elections slated for October-November 24.
Apart from this, we largely expect the government's policy agenda to continue with a sustained focus on infrastructure, capex, and manufacturing, which will occupy centre stage.
Nifty has rallied more than 12 per cent since the election outcome, while the broader market witnessed a much sharper upsurge of 20 per cent, thus making valuations expensive.
Nifty is trading at 21.7 times FY25 earnings, which is slightly above its long-term average P/E of 20.2 times.
On the other hand, midcaps and small-caps are trading at more than 35 times and 24 times P/E versus their long-term average of 21.5 times and 15.8 times, respectively.
Thus, markets are overheated, especially the broader market. At this juncture, one must identify the excessively overheated pockets and book partial profit from them.
Building a portfolio at such an expensive valuation is a challenge.
It would be best to adopt a stock-specific approach to find pockets of growth at a reasonable valuation.
There are many niche stocks and sectors in the broader market which are likely to benefit from the government’s push on manufacturing and capex in order to attain Atmanirbhar Bharat.
Moreover, India is currently witnessing excellent macros with GDP growth of 8.2 per cent in FY24, inflation at nearly 5 per cent and both current account and fiscal deficits well within the tolerance band.
With a healthy economy, mid and small-size companies generally tend to do well.
This is well reflected in robust corporate earnings over the past few quarters.
Thus, India’s unique combination of ‘size and growth’ along with the expectation of policy continuity with the return of the Modi-led NDA government, will drive the overall economic momentum further.
Indian capital markets have witnessed a consistent upward trend over the past three years, primarily led by a surge in retail investors’ savings pool, particularly in equities.
Total demat accounts have surged to 160 million in Jun’24 from 36 million in Mar’20.
India’s Mutual Fund Equity AUM has jumped to ₹6.1 trillion in Mar’20 from ₹1.9 trillion in Mar’14, and stands at ₹27.7 trillion as of May’24.
Broader themes of financialization and digitization of savings are driving this surge in retail investors.
The SEBI committee recently proposed several stricter measures to curb derivative volume, including charging mechanisms, increasing minimum lot size, and restricting weekly options.
These measures, though, will affect brokers in the short term but will help curb the excess speculation in the market.
The government’s focus on manufacturing, capex and infrastructure creation will likely remain for the coming years, which presents a huge opportunity for sectors like industrials, railways, defence, and PSUs.
Though after sharp rallies and outperformance, the valuations of these sectors have turned overheated, we believe the long-term prospects are really bright.
Thus, from a risk-reward perspective, they may see some moderation in valuations in the near term before they become attractive again.
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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.
