Investors could be disappointed if the upcoming budget has lesser allocation of funds to the crucial domestic manufacturing sectors like defence, railways, and road infrastructure. Additionally, Sandip Raichura, CEO of Retail Broking & Distribution and director at Prabhudas Lilladher, warns that a lack of a populist streak in the budget might also spark dissatisfaction among investors.
“A prudent approach would be to stay on the sidelines and hold quality stocks until after the Budget is announced,” he said. The markets have already surged close to 5% over the past month in anticipation of the Budget and interest rate cuts, so some profit-taking cannot be ruled out, he added.
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The June quarter (Q1 FY25) earnings are expected to be a mixed bag. Based on operational updates, it is evident that banks will likely witness a weak quarter due to soft loan and deposit growth attributed to seasonality. Net interest margins (NIMs) are also expected to contract.
We anticipate strong performances from sectors such as auto, capital goods, pharma, and cement. In autos, the trend towards premiumization is expected to expand margins, while increased sales in the US are likely to bolster pharma companies' results. For capital goods, a key area to monitor will be whether order inflows in Q1 were impacted by the general elections in India.
Key areas to watch include the trend in volume growth for consumer companies, the trajectory of order books for defence and railway companies, and management commentary from IT firms.
The Modi 3.0 Budget must strike a balance between populism and vigilant management of India’s fiscal deficit. Simultaneously, it needs to pave the way for advancing the agenda of Atmanirbhar Bharat and executing a robust capital expenditure of ₹11 trillion as announced in the Interim Budget.
Over the next 6-8 months, assembly elections are scheduled in Maharashtra, Jharkhand, Jammu & Kashmir, and Haryana. Therefore, the Budget is expected to prioritize farmers, the rural and urban poor, and the middle class. I think there will be an increase in outlay for rural development and special focus on employment-related sectors.
Against this backdrop, international credit rating agencies are closely monitoring how finance minister Nirmala Sitharaman plans to achieve the FY26 target of a 4.5% fiscal deficit as India progresses towards its Viksit Bharat goal.
There is speculation about indexing tax slabs to inflation, or introducing new tax slab for lower-income groups or a substantial increase in standard deduction limits. Currently, salaried taxpayers benefit from a standard deduction of ₹50,000, and an increase could potentially bolster savings and boost spending among the middle-class population. If this does not happen, it can upset the common man and some disappointment could be reflected in the stock market.
Investors will also be disappointed if lesser allocation is made to key areas of domestic manufacturing such as defence, railways and road infrastructure. Furthermore, if this budget lacks a populist streak, that could be another source of disappointment.
The consumer sector could take centre stage post-Budget. If measures addressing employment opportunities and disposable income are incorporated, it could significantly bolster consumer staples, consumer durables, autos and other discretionary stocks.
Additionally, sectors that have shown momentum, such as defence, railways, and capital goods, are expected to be in the spotlight if government spending sustains.
Also, focus will be on disinvestment-related public sector undertaking (PSU) stocks. Investors have eagerly waited for updates on key disinvestments (like Container Corp. of India and IDBI Bank), but there have been no recent developments. With a coalition government in power after 10 years, it is key to watch how disinvestments are progressing.
Our belief is that a progressive budget and normal monsoons will keep foreign institutional investor (FII) and domestic institutional investor (DII) inflows strong going ahead. Once earnings and the Budget are behind us, attention will shift towards the comeback of FIIs in a big way. In the first six months of 2024, financials, FMCG, and IT sectors bore the brunt of FII selling. When FIIs return, large-caps stand to benefit the most due to ample liquidity.
Additionally, potential rate cuts by the Federal Reserve will also be on the radar. Markets have already risen in anticipation of an imminent rate cut, so any delay in this decision could disappoint investors.
A prudent approach would be to stay on the sidelines and hold quality stocks until after the Budget is announced. The markets have already surged close to 5% over the past month in anticipation of the Budget and interest rate cuts, so some profit-taking cannot be ruled out. There are areas of overvaluation in the mid- and small-cap segments.
For instance, there are days when small- and mid-cap stocks surge by 20% on positive news, only to decline in subsequent days. It is advisable to wait until the markets show a clear direction after July.
As of now, we have no intention of launching any discount brokerage product because we believe there is a significant market for value-added premium services. Western markets have demonstrated the sustainability of value-added models despite strong competition from deep discount brokers. We aim to leverage our strengths in research and networks to create value for clients, rather than through price discounting. Furthermore, with the Securities and Exchange Board of India's latest 'true to label' circular, the discount broking model seems to be under threat.
