The Budget 2022 proposals have mostly got a thumbs-up from most brokerages, who believe the government has doled out enough incentives via capex outlay to push demand. Here’s a quick look into how they have interpreted the Budget math and the sectors they remain bullish and bearish on in this backdrop.
The budget maintains a pro-growth bias with slightly looser-than-expected fiscal deficit targets. The government’s estimates for the fiscal deficit are higher than we expected at 6.9 per cent of GDP for F2022 and 6.4 per cent of GDP for F2023. We are looking at a new capex cycle and, hence, a new profit cycle and an exit from the RBI. That augurs well for our overweight sectors such as Financials, Discretionary Consumption and Industrials. Remain underweight on exporters and defensives, including Technology, Healthcare, Energy and Materials.
The RBI will likely see the budget as more neutral for inflation (good quality of spending), but large government borrowings will complicate its liquidity normalisation strategy. Given elevated underlying inflation and an aggressive Fed, we expect 20 basis point (bp) reverse repo rate hikes in February and April, and 100bp in repo rate hikes in 2022, starting from April.
This budget can be best described as a conservative one in its revenue estimations, spends (too cautious given some demand weaknesses), focus (primarily Infrastructure, and new industries), and tax approach (no major changes), which is a good thing. Overall, the underlying fiscal support to aggregate demand (fiscal impulse) remains somewhat negative in FY23, although to the extent that spending tilt is towards capex, it is more productive. However, higher-than-expected market borrowing has pushed bond yields higher. This, along with fading global reflation, is likely to make 2022 outlook more uncertain. Retain our December 2022 target for the Nifty at 18,000. Remain overweight on IT, Banks, Auto (two-wheelers), and Consumer staples. There’s some risk to Consumer staples – particularly rural – given the lack of demand impulses or budget support, but would hold that position amid our defensive positioning on the market, as global and rate risks linger.
The current environment for profit and investment cycle resembles the early stage of the 2003-08 cycle while the interest rate cycle has just started to turn from the bottom. Market valuations remain high at 20.6x on a one-year forward basis thereby constraining high returns expectations. However, stocks related to the capex cycle and related credit growth are in the nascent stage of a growth cycle and valuations are nowhere close to the euphoric valuations visible in the ‘growth and low volatility’ stocks in the market.
Motilal Oswal Securities
Just like in FY22, the government will have an option to either spend more or to consolidate further in FY23. Such conservative receipt estimates are the primary reason for higher-than-expected fiscal deficit and, thus, borrowings in FY22/FY23, which spooked the debt markets. From an equity market perspective, the budget, on balance, has no unpleasant surprises. Economic recovery in FY23 coupled with vaccination progress would continue to drive demand recovery ahead. Crude prices around $90 will present a challenge for inflation ahead and act as a risk for fiscal math. We prefer BFSI, IT, Consumer, Telecom, Metals and Cement; Underweight on Auto and Energy.
The phase of making easy money in the markets like 2021 is over and they’re likely to remain volatile in 2022. We remain overweight and increase weightage on Engineering/ capital Goods and Banks. Fading Covid wave will boost demand and fortunes of discretionary segments like Apparel, Footwear, Multiplex, Travel and Tourism, Aviation etc. Retain base case Nifty target at 19,979 as we value NIFTY at 10 per cent premium to last 10-year’s average PE of 20.5x on December 2023 EPS of Rs 887. Worst-case scenario Nifty target is 18,183 in case volatility persists.