Interview | Earnings upgrades to continue in coming quarters, prefer 5 sectors post Budget: Gopal Kavalireddi of FYERS

Market Outlook

Gopal Kavalireddi of FYERS said the Budget has met most of their expectations and they would rate it at 9 out of 10. It is important to treat this as a ‘Rebuilding India – Post COVID Budget’ and not as any other generic Budget,” he said in an interview to Moneycontrol’s Sunil Shankar Matkar.

The Head of Research at FYERS feels quality will still be the priority. Preferred sectors would be BFSI, IT, pharma, metals, along with realty, infrastructure and industrials as a basket allocation, he advised.

“Earnings upgrades will continue in the coming quarters and investors are advised to invest based on a systematic approach,” he said.

Edited excerpts:-

Q: What is your reading on Union Budget 2021 and is it really a game changer one? Has the budget met your expectations? What is your rating out of 10?

It is indeed a very good budget, addressing the anaemic economic growth of the last few years. This year, most budgetary allocations are focussed towards Capex and asset creation rather than simple expenditure. Presenting a budget without raising taxes to meet the budgetary requirements is a highly improbable process. But the finance minister has shown that it is possible. Allocation to health, infrastructure – roads, railways, ports and industrials was commendable. Overall, the budget has met most of our expectations and I would rate it at 9 out of 10. A stable & simplified tax regime and a strong push for growth are the defining characters of this budget. It is important to treat this as a ‘Rebuilding India – Post COVID Budget’ and not as any other generic budget. The finance minister has delivered the most appropriate budget for a resurgent India.

Q: What are the announcements in the budget which surprise as well as hurt you?

The budget signals a change in approach of the government, moving away from a 1-year perspective to a medium-term growth outlook. The most surprising part of this budget is higher allocation to important sectors of the economy without a hike in taxes, which is normally not the route opted by governments to address any depressed revenue situation. Finance Minister has reiterated the administration’s commitment of Rs 1.97 lakh crore in next 5 years starting FY2021-22, to manufacturing through 13 Production Linked Incentive (PLI) schemes.

The alarming part of the budget notes was the 9.5 percent fiscal deficit, with gross borrowing of Rs 12 lakh crore done already, and Rs 80,000 crore of borrowing still to follow. Though this is understandable, coming in a pandemic hit year, the bond market could see some impact, with a possible rise in yields. There is nothing dramatic in the budget documents to hurt the common man, but a disappointment for not providing any possible relief to individual tax payers and on the other hand Provident Fund contributions above Rs 2.5 lakh a year being made taxable at normal rates has not gone down well. The agriculture infrastructure development cess was a surprise but is imposed on fewer items only and is not expected to impact the common man.

Q: What are those key sectors that you would benefit the most from this budget and what are stocks to look at?

Economy facing sectors like cement, steel, power catering to the infrastructure segment (a 37 percent increase in budget) would be the largest beneficiaries. The outlay for the roads sector has been increased from Rs 91,000 crore to Rs 1.18 lakh crore. With a large capex, focussed more on asset creation, government has provided the necessary impetus for a stronger economic growth in the upcoming year. The extension of tax holiday for affordable housing segment should benefit realty companies catering to this segment.

Initiatives such as Jal Jeevan Mission (400 percent increase) for universal water supply and Urban Swachh Bharat Mission with a large outlay should help piping, environment related, water, and waste management companies. Health sector with an outlay of more than Rs 2.23 lakh crore (138 percent increase) would bring focus to hospitals and pharma companies providing products and services to primary and tertiary care. The vehicle scrappage policy, which has been in the making for a very long time, will support auto sector growth.

BFSI, Infrastructure, Cement, Auto, Realty, Textiles seem to the possible gainers at this point.

Q: What would be your investment strategy post Budget and what is your advice to retail investors? What is your view on market?

The market is already factoring in a recovery in economy, with hefty increase in Nifty EPS earnings in FY21 & FY22. The rally in Nifty following a bearish price action in earlier week (to the budget) suggests that we could see further short unwinding in the days ahead. Looking from a medium-term perspective (5-6 months), the trajectory remains bullish as the index continues trading above an important rising trend line, drawn connecting the March and September 2020 lows. Support for this trend line is currently seen at around 13,300. Until it holds, the bias is skewed for a potential upside of 15,000-15,500.

Sector wise, banking sector is showing good momentum. The Bank Nifty index showed good relative strength last week versus the Nifty, before climbing to its life-time high today. With key technical hurdles crossed, we could see Bank Nifty outperforming the markets in the weeks ahead. Other than banks, Auto, Metal, Realty, and Infra sector as exhibiting considerable strength, from a medium-term perspective. The Infra sector, in particular, is at an interesting juncture, right at the upper end of multi-year consolidation. A breakout of this band would open door for a multi-year bull market.

Having said that, given the markets strong upmove over the past 10-months, it is important to be selective in every investor’s approach towards stock selection, and prudent risk management policies need to be implemented. Traders should work with good stop losses which investors need to invest with a medium to long term outlook.

Q: What should be the portfolio allocation in terms of sectors after Budget? Also, what should be avoided sectors?

While budget has brought most of the old economy facing sectors into focus, it is still the responsibility of each investor to rebalance their individual portfolios, taking valuations and growth prospects into account. It is also essential to remember that capex isn’t done overnight and assets don’t get created in a matter of days. With that in mind and couple with the present euphoria in stock markets, it is necessary to rebalance the portfolio slowly and based on earnings growth.

As IT and Pharma continue to remain in portfolio albeit at a lower weight post their excellent run over the last 1 year, infrastructure and realty sectors can be introduced at a smaller portion. Banking, financials and insurance will continue to rule the roost at the highest allocation in the portfolio. However, it is essential to avoid banks with higher proforma NPAs, as situation could become tougher post March quarter results.

Quality will still be the order of the order. Sectors would be BFSI, IT, Pharma, Metals, along with Realty, Infrastructure and Industrials as a basket allocation. Earnings upgrades will continue in the coming quarters and investors are advised to invest based on a systematic approach.

Q: Should one start focussing on the auto space after the Budget, scrappage policy and January sales data?

Auto sales are showing considerable rise over the last few months. Tractors as a segment have done phenomenally well. Personal mobility is back in focus on the back of pandemic scare and hence, passenger cars as well as two wheelers are witnessing good traction. Among commercial vehicles, while LCV segment saw better growth, medium and heavy commercial vehicles (CV) haven’t shown any positive momentum.

The newly-announced scrappage policy should provide a boost to commercial vehicles segment. In addition, the boost to infrastructure development in terms of road construction, freight corridors etc planned would put focus back on the CV segment. Turnover of auto industry to increase by at least 30 percent due to this policy while creating sufficient jobs.

Q: Can the government achieve its divestment target of Rs 1.75 lakh crore including two PSU banks, 1 general insurance company. Government promised to complete LIC IPO in FY22?

While the divestment target of Rs 1.75 lakh crore seems steep at this point, it is achievable, provided that government unveils a feasible roadmap with clear deadlines to prospective investors. A few divestments like Bharat Petroleum Corporation, Container Corporation of India, Bharat Earth Movers (BEML), Shipping Corporation of India are already announced and underway.

LIC IPO would be a behemoth task in front of the government and once accomplished successfully, I wouldn’t be surprised if the divestment target is exceeded by end of FY22. While it is difficult to predict which PSU banks are selected for divestment, two banks out of J&K Bank, Bank of Maharashtra, UCO Bank, Central Bank and Indian Overseas Bank could be a possibility.

The finance minister has made a subtle policy change, rewording divestment as privatization and this augurs well for aspiring investors bidding for these assets and companies.

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