For Shailendra Kumar of Narnolia Financial Advisors, the biggest surprise in Budget 2021 was the confidence with which a real financial picture of India has been presented. “The fiscal deficit is high and needs to remain higher for a couple of years for a growing economy like India has been rightly defended,” he said in an interview to Moneycontrol’s Sunil Shankar Matkar.
He feels there are no areas in the Budget which are like a hurt. “But there could have been some more reforms around social and healthcare infra.”
The Chief Investment Officer and Co-Founder of Narnolia feels the idea of a ‘bad bank’ was discussed among economists and analysts for long but now was the best time to get it done and the Finance Minister has rightly delivered it. Edited Excerpts:-
Q: What is your reading on the Union Budget 2021 – is it really a game changer? What is your rating out of 10?
It is a game-changing budget in the sense that the budget numbers are very credible along with strong and timely reform measures. Budget numbers while looks conservative on the revenue side it looks realistic on the expenditure side. The government has used the situation arising out of the pandemic to come with a clearer picture of its finances. This shows that India is getting confident about its future financial health and that’s a big positive for investors focussed on Indian growth opportunity. The idea of a ‘bad bank’ was discussed among economists and analysts for long but now was the best time to get it done and the Finance Minister has rightly delivered it. We have already seen the peak of bad assets in the Indian banking sector and now we have enough data points post IBC to rightly price bad assets.
Monetization of operating assets along with divestment and privatization are some of the other bold moves in this budget. Higher capital expenditure without raising tax rates is also a big positive of this budget. I am giving the budget 8 on 10. I am keeping the 2 points right now as this budget to give full benefits needs to be executed rightly else in terms of the intent this budget deserves full 10 on 10.
Q: Which announcements in the Budget surprised and which ones hurt you?
For me the biggest surprise was the confidence with which a real financial picture of India has been presented. The fiscal deficit is high and needs to remain higher for a couple of years for a growing economy like India has been rightly defended. At the same time, right mechanism for infrastructure funding has been put into place. Another surprise for me is a much-calibrated budget allocation that gives demand push but does not stroke inflation. There is no area in the budget which is like a hurt for me. But there could have been some more reforms around social and healthcare infra.
Q: Which sectors could benefit the most from this Budget and what are stocks to look at?
Q: The banking sector is the biggest gainer from the budget announced. The other beneficiary is the infrastructure sector along with materials that go into building those infrastructures. In fact, the positive second-order impact of this calibrated infrastructure push along with various Production Linked Incentive Scheme will be to various manufacturing sectors like- electronics, auto, chemicals, food processing, and capital goods sector.
Q: What would be your investment strategy post Budget and what is your advise to retail investors? What is your view on market?
After the sharp rally over the last nine months, a further rally of the market hinges upon earnings normalization going forward. Nifty earnings over the last ten years have been mere 5 percent lagging the nominal GDP growth by a big margin. Corporate Profit as a percentage of GDP has fallen from 7.8 percent to 2.8 percent. Now our economy looks all set in for 7.5-8 percent real and 12-13 percent nominal growth over the next 3-4 years and what the stock market requires is that corporate profit grows faster.
We are already working with this earnings normalization theme for some time and post this budget that thesis becomes even stronger. The banking sector’s poor performance along with other factors was behind the slow pace of corporate earnings growth in the recent past.
Q: What should be the portfolio allocation in terms of sectors after Budget? Also what should be avoided sectors?
Banking stocks that we own will drive a large part of our near-term performance. But we are in a structural bull market and every sector at various points in time going forward will exhibit outperformance. Unlike 2013-17 rallies where only consumer-facing stocks showed outperformance, this rally starting 2020 would be much wider. So tactically one can buy a sector that is underperforming for a month or two and accumulate there for more active higher returns.
Remember during October, November last year, IT was going through consolidation and then rallied strongly in January this year. Also during the current rally starting April 2020, there had been multiple time-periods where banking stocks were underperforming but later they outperformed sharply. Also, we need to analyze and understand REITs and InvITs because now one should expect lots of offerings coming in this form.
Q: What are your expectations on RBI monetary policy scheduled to be held on Friday especially after Budget?
Consumer price inflation in December has come at 4.59 percent and is well inside RBI’s comfort zone. A higher fiscal deficit announced in the budget should not be a surprise for RBI as in a post-COVID world RBI is already witnessing higher government borrowing. I expect the continuation of pause by RBI. Post-budget bond yield has gone up by mere 15 bps. Also in the worst-case scenario steepness in the bond yield curve where 10-year bond yield did not fall in line with a cut in repo rate by RBI during 2020 calendar years will cushion some impacts if and whenever RBI starts tightening during 2021.
Q: Should one start focussing on the auto space after the Budget, scrappage policy and January sales data?
The auto sector has gone through a low growth phase and multiple regulatory changes during the last 3 years and the sector has underperformed. We have to wait for more clarity on the Scrappage policy as that will be announced by the transport ministry in the next 10-15 days. What FM has said during her budget speech does not look large enough to spur demand. Also, it is 2-wheeler that is not recovering post–COVID as the economy is yet to see recovery among those who are target consumer of two wheelers. But the infrastructure push that has been given should help going forward in this regard.
Q: Should one stay more with mid, smallcaps compared to largecaps post Budget?
Mid and smallcap stocks should be doing slightly better than their larger counterpart. Over the last three years, many of the problems associated with mid and small-cap companies like higher debt, etc. have receded. These companies are showing better cash flows now as they have improved their working capital. But one needs to focus more on the individual stock in terms of their potential to deliver better returns. Also, during a market rally like the one we are witnessing one should not ignore the quality of the business they are investing into.
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