With Budget 2021 out of the way, Devang Mehta of Centrum Broking feels the markets will start following corporate earnings.
The ideal strategy has to be to ignore the noise & focus on building sound portfolio. Rather than following & chasing indices, the impetus should be on understanding key themes, sectors & businesses and buy/accumulate those on dips. An approach to build portfolio in tranches will ensure that one takes advantage of volatility rather than running away from it, he said.
The Head – Equity Advisory at Centrum Broking feels the central bank on February 5 is expected to maintain status quo and keep the monetary stance accommodative at the policy review though it will take guidance from the budget.
Edited Excerpts:-
Q: What is your reading on Union Budget 2021 and is it really a game changer one? Have the budget met your expectations? What is your rating out of 10?
The Union Budget 2021 is an expansionary one with a definitive vision to spur capex, infrastructure & healthcare spending. The way forward for divestments, privatization & asset monetization looks encouraging. It lauds the central government’s intent of prioritizing growth- oriented measures with the clear commitment to warrant that the momentum of recovery seen in the economy recently remains sustainable. Going with a sharp correction into the budget, the street was enthused by the absence of negatives and an attempt to be focused on robust growth for key sectors & in turn boost economic growth. Rather than being a game changer, it provided the much needed continuity in terms of simplifying complex areas, remain committed towards key reforms & refraining from putting undue burden on honest tax payers.
It highlights the fact that ‘Simplicity is the Ultimate Sophistication’. It ranks in the top quartile amongst the budgets of last two decades, but with a caveat ‘Execution is the key monitorable’.
Q: What are the announcements in the budget which surprise as well as hurt you?
There was an underlying pessimism amongst the investors & tax payers on raising tax rates or taxing the super rich, which did not materialize & was a pleasant surprise. We believe that the commitment to monetize assets and initiating strategic disinvestment is indeed a big positive, however, its execution will remain the key. Right from the FM announcing a new centrally sponsored health scheme with an outlay of Rs 64,180 crore over the next six years to the announcement of boosting economic growth via infrastructure creation, the budget has been able to address the most pertinent issue of health crisis and has also ensured that the economy continue to march towards a durable and a sustainable recovery path. From proposing to establish a new DFI on a capital base of Rs 20,000 crore to demonstrating the government’s willingness to infuse Rs 20,000 crore into public sector banks in FY22, to meet regulatory norms, the budget also aims to ensure that the financial stability remains intact and over the years, these financial institutions become an enabler of growth.
The biggest positive seems to be that there are no negatives like taxes on the ultra-rich, no COVID cess or any tinkering with long term capital gains tax. Putting more money in the hands of consumer or tax payer is always the wish list before budget, but it is also imperative to not change the slabs & structures too often.
Q: What are those key sectors that you would benefit the most from this budget and what are stocks to look at?
There are a host of sectors which will be benefitted by this budget. Consolidation in the banking sector seems inevitable. Larger private banks will gain market share & be favoured picks for longer term. Insurance companies, both life & non-life will benefit from hike in the FDI limit. Infra spending & impetus on housing will boost the prospects of building material companies (cement, paints, adhesives, ceramics, electrical goods). Healthcare, pharma & diagnostic companies will also benefit with enhanced focus & spending by the government. Select capital goods, IT automation, infrastructure allied companies will find favour with the investors after a long hibernation. Domestic auto makers, who are coming out of a difficult cycle will probably have some good times going forward. Agri related businesses stand to benefit due to enhanced emphasis on increasing farm incomes & making rural India more stronger.
Q: What would be your investment strategy post budget and what is your advise to retail investors? What is your view on market?
With a key event out of the way, the markets will start to follow corporate earnings & will be driven either ways with the force or lack of liquidity. The ideal strategy has to be to ignore the noise & focus on building sound portfolios. Rather than following & chasing indices, the impetus should be on understanding key themes, sectors & businesses and buy/accumulate those on dips. An approach to build portfolio in tranches will ensure that one takes advantage of volatility rather than running away from it. Markets have seen a fast & furious rally since last year’s March lows. To expect a one way trend is too much to expect. Global market trends & liquidity will decide the market direction in the medium term, however, the structural bull run in India is likely to continue on the back of return of the strong earnings growth. Corrections & ebbs are part of every bull market & one has to be prepared to take temporary drawdowns for compounded longer term returns.
Q: What should be the portfolio allocation in terms of sectors after budget? Also what should be avoided sectors?
The three pillars of our investment philosophy are size of the opportunity for the sector or industry, high or dominant market share of the company & margin of safety in terms of a host of qualitative & quantitative parameters.
We have been bullish on sectors like building materials, private banks, select NBFCs, Insurance companies, Discretionary & Non-discretionary consumption companies, niche pharma, healthcare & diagnostic laboratories, Select Auto, IT, Automation & agri related companies. These have been the mainstays in our client portfolios & have been showing robust earnings growth. We generally tend to avoid global cyclicals as a part of our core portfolio.
Q: What are your expectations on RBI monetary policy scheduled to be held on Friday especially after budget?
With Government & RBI both focused on growth, it appears that India will be able to retain the economic momentum. The central bank is expected to maintain status quo and keep the monetary stance accommodative at the policy review though it will take guidance from the budget. Largely the commentary & the tone seems more important, as it immediately follows the budget.
Q: Should one start focussing on the auto space after the budget, scrappage policy and January sales data?
Auto sector was under a deep turmoil since last couple of years. It seems to be coming back on track after a COVID induced slowdown for the large part of the last calendar year. But the festive season did see pent up demand coming back & also a need for a personal vehicle to safeguard one’s family & avoid public transport, did help the two wheeler & small car makers. Also, a number of auto companies have done well in reducing costs, improving productivity, changing their capital allocation policies, which will help in the medium term.
Q: Will the budget announcements really help India to achieve $ 5 trillion economy target by 2024?
Yes, there are a number of steps in the direction of making India a $ 5 trillion economy. One of the key announcement for the banking sector that addresses the issue of bad loans is the creation of an Asset Reconstruction and Management Company that will function as a “bad bank”. This would give banks the much needed room to focus on core activities instead of fretting over their impaired loans. These will enable bankers to focus on their core activity of lending. Spending on infra & other allied industries will lead to more job creation which in turn helps economic growth. Also, ease of conducting business & making compliance simpler will enable foreign capital both in the form of FDI & FII reach Indian shores.
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