Sonam Srivastava is the Founder of Wright Research
Budget 2023 is likely to focus on capital expenditure as a growth driver and give an impetus to manufacturing while continuing with the post-pandemic fiscal consolidation, Sonam Srivastava of Wright Research told Moneycontrol in an interview.
In the upcoming Union Budget, she believes the finance minister will try to boost capital expenditure from the current 2.9 percent GDP to nearly 3.5 percent.
The co-founder of Wright Research, with over nine years of experience in quantitative research and portfolio management, expects manufacturing, capital goods, defence, sustainability, railways, and public sector banks sectors to continue to be in the spotlight. Edited excerpts:
Since it is the last full-fledged budget of the current government before the general elections in 2024, do you think it will be a populist budget?
Budget 2023 is likely to focus on capital expenditure as a growth driver and give an impetus to manufacturing while continuing with the post-pandemic fiscal consolidation. The finance minister will try to boost capital expenditure from the current 2.9 percent GDP to nearly 3.5 percent.
She might also rationalise personal income-tax rates to lift demand. The focus will also be to improve the ease of doing business. The Budget is expected to continue focusing on domestic manufacturing revival, and PLI schemes for labour-intensive sectors are likely. Most importantly, instead of going populist, the Budget is expected to continue to focus on post-Covid fiscal consolidation and focus on divestment and reduction of subsidies.
What are the themes expected to emerge from the Union Budget 2023?
With the budget coming at the beginning of 2023, the sectors that the government is looking to focus on – manufacturing, capital goods, defence, sustainability, railways, and public sector banks are already seeing fresh investments. So we expect these sectors to continue to be in the spotlight.
The theme of chasing stocks getting government Capex and incentives from the PLI scheme will outperform in the run-up to the budget.
We are excited about the infrastructure segment with the funding in view, especially stocks linked to defence and railways. Other industries like sugar, fertilisers, textiles, and paper are flourishing due to subsidy-linked announcements.
We are bullish in the capital goods space, and private investment remains strong in India despite global volatility. The government is incentivising domestic manufacturing and defence indigenisation, and the private sector is seeing Capex in the energy transformation, emerging tech and warehousing.
Do you see any valuation challenges for private banks?
With the significant improvements in asset quality, banks are benefiting from low NPA (non-performing asset) cycle and loan growth backed by capital availability after many years. Private banks have been a beneficiary of this upcycle. Still, the PSU banks have flourished even more. If you look at specific deep-value indicators based on profit growth and margin expansion, many small and medium banks are still undervalued. Looking at the correlation breakdown that we saw between the Nifty and the BankNifty after the pandemic, the banks are still at the lower end of valuation and have scope to grow.
Even though many expect the credit growth rate to peak soon and margin and profitability to get impacted as the economic growth slows down. But this would impact the PSUs more than the Private banks.
Considering the current environment, especially after the market scaled a record high, do you think there’s some kind of rebalancing happening in the Indian equities? Also, do you see possibility of Nifty falling by another 5 percent from here on?
It is no secret that the Nifty has underperformed its global peers for some time. In 2023 Chinese and Asian markets are leading the pack, while the US and European markets are also relatively buoyant. Nifty, on the other hand, has turned negative this year. This might be because of the high valuation that the Nifty commands, due to which the re-opening Asian economies look much more attractive value buys.
We do expect the volatility to continue till the budget. The market has fallen five times while gaining six times in the month ahead of the Union Budget in the last 11 years and has oscillated between -3 and +3 percent. The budget day has been joyous most of the time, and the post-budget has been more positive than negative. The announcements in the budget could be crucial – if the budget is too populist, it might hurt sentiments, while a more cautious budget might be more welcome.
Which are the five themes that stand out in 2023?
Themes that stand out over 2023 would be:
Lower Inflation & Interest Rates Peaking – Inflation seems to have peaked worldwide and is gradually easing. The interest rates also peak with inflation.
Lower Dollar – With the rates about to peak, the US dollar’s attractiveness would soon be reduced, and the emerging market currencies will recover.
Capital Expenditure – Private investment remains strong in India despite global volatility. The government will incentivise domestic manufacturing and defence indigenization.
Manufacturing & Infrastructure – with the budget coming at the beginning of 2023 and the state and general elections looking – the government will spend on infrastructure. Boosting domestic manufacturing will be the key to India’s differentiation.
Banking Sector Improvements – Banks’ asset quality, corporate loan portfolios and earnings have improved. As a result, higher margins will support the banking sector’s strong performance, continued credit growth and improved trade debt over the next few years.
Do you expect significant buying to emerge in tech stocks after March 2023 quarter? Also, what do you make out of IT biggies’ commentaries post-December quarter earnings?
The Indian IT industry is a significant player in the global economy, contributing billions of dollars in revenue every year. But, like all industries, it is not immune to the effects of a worldwide recession. Therefore, the growth of Indian IT is heavily dependent on the global market. For example, our IT industry is dependent on American and European markets for 70 percent of the revenue, and IT spending is heavily reliant on the growth of the consumer and banking sectors.
While the Tech companies have been posting good numbers and remain confident in projections, we still see scope for worry due to a potential slowdown in global demand. Larger IT companies might be a safer bet in this environment, but we have to wait to see a revival in IT, which might be delayed by more than a quarter. As a result, we would be cautious about this sector.
Are you bullish on sectors that benefit from lower commodity prices?
Sectors that are benefitting from lower commodity prices are going to post good numbers this earning season. They will see margin expansions and profitability growth. Autos, Cement, FMCG, and Consumer Discretionary are some of the names that will see a revival. But the revision of these sectors’ price and earnings estimates will depend more on future projections like the revival of rural demand and the growth projections in the domestic and global economy. So I would see the benefit of lower commodity prices for a few sectors, but I would still be selective in picking stocks.
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