Anil Rego of Right Horizons
Since salaried employees are an important source of revenue and this is the last budget before elections, the finance minister may provide relief to the middle-class by increasing the exemption limit and incentivise investments, feels Anil Rego of Right Horizons.
In an interview with Moneycontrol, the founder and fund manager of the company also said that the government is expected to scale down the disinvestment target to around Rs 40,000 crore for FY24 since it is challenging to divest stakes in the public sector undertakings and the last sale in 2022 did not meet the expectations.
Rego, who is also a chartered financial analyst, feels that China and India are expected to be the fastest-growing markets in 2023; and in India, companies with domestic exposure are better investment opportunities in 2023. Edited excerpts:
What are the key focus areas in the Budget 2023? Also, do you think this budget assumes a great significance considering the general elections next year and several states elections this year?
The government is committed to introducing and implementing reforms and making it easier for companies to do business. We expect the government to take initiatives with a focus towards making India self-sufficient and, as a result promoting investments in infrastructure and the private sector.
Since salaried employees are an important source of revenue and it is the last budget before elections, the government will likely provide relief to the middle-class by increasing the exemption limit and incentivising savings and investments.
The government will likely continue its focus on the disinvestment target, bring pace to PSU privatisation, deepen corporate bond markets for the financing infrastructure plan, and benefits MSMEs since MSME contributes nearly 30 percent to GDP.
India contributes to only 2 percent of global exports currently, and the conducive policies are pushing for a manufacturing hub that will benefit several sectors like automobiles, chemicals, electronics and engineering goods.
The previous budget was focused on infrastructure, and developing India as a manufacturing hub, we expect this trend to continue and additional investments in renewables and reforms to stimulate consumption through consumer durables and electronics. While manufacturing continues to be the focus, India has an edge in the services sector, and the development of services will have a holistic impact on the drivers of growth for the economy.
Do you see the government making changes to direct taxes?
There are more than 80 million taxpayers in India, and salaried employees are the biggest contributors to taxes, in India. The basic income tax exemption limit is Rs 2.5 lakh for individual taxpayers under both the old and new income tax regimes which may be raised to Rs 5 Lakh, and the standard deduction of Rs 50,000 could be enhanced to around Rs 80,000, rendering some tax relief to the country’s middle-class population.
Increasing tax exemption will provide relief to the lower-earning class consumers since they are facing challenges such as high inflation leading to lower savings, increasing interest rates have increased the monthly EMIs for home loans and other loans, and higher fuel prices have impacted the household budget. Tweaking the slab rates and providing relief will lead to an increase in disposable income and boost consumption.
Do yu expect the government to come out with a more realistic divestment target for FY24?
The government planned for a Rs 65,000 crore divestment target in FY23, however, a significant portion was missed because of unfavourable market conditions, triggered by worsening economic scenario around the world.
The government is expected to scale down the disinvestment target to around Rs 40,000 crore for FY24 since it is challenging to divest stakes in the public sector undertakings and the last sale in 2022 did not meet the expectations.
Due to uncertainties in the global economy and market conditions, the proposed sale of Bharat Petroleum Corporation (BPCL) couldn’t go through, and the IDBI Bank proceeds are unlikely to materialise in FY23.
If there is any pick up in capex, which are the top two sectors that will attract the maximum expenditure going forward?
We believe India is at the inflection of a new CAPEX upcycle, nearly two decades since the country’s last infrastructure supercycle of 2003-08. The new private Capex is expected to be independent of utilisation driven by a transition to renewables, EVs (electric vehicles), battery technology and hydrogen, manufacturing CAPEX led by production-linked incentives, diversification in the supply chain and the global China & Europe Plus One strategy, and 5G technology disruptions driving data centre demand and e-commerce growth.
CAPEX by the governments has risen to a record high of Rs 12.3 trillion on a TTM basis and is likely to exceed Rs 14 trillion in FY23 as per the budget estimates and trends. The drivers of the CAPEX cycle in India are the positive sentiment in capital-intensive sectors such as energy, power, mining, infrastructure, construction materials, real estate, digital infrastructure, PLI-incentivised sectors, availability of financial resources and rising capacity utilisation, credit growth and stability in commodity prices after the spike at the start of the Russia-Ukraine war.
Are you gung-ho on capital goods space?
The government’s pillars of asset creation (NIP), asset recycling (NMP) and integrated planning (Gati Shakti) are expected to reboot India’s infrastructure cycle. Being at the cusp of a new CAPEX upcycle after two decades of an infrastructure Supercycle in 2003 – 08, the stocks in the sector are expected to benefit from a valuation rerating.
Have you started advising your investors to take positions in technology stocks as these stocks seem to be looking attractive?
The IT Services sector benefitted from a rerating post-pandemic as the demand for technology demand surged. Markets have been expecting a slowdown, as reflected by the decline in the IT sector. However, the revenue estimates have only started declining for global SaaS players.
Tier-I information technology services companies are expected to post average constant currency (CC) revenue growth in Q3FY23 driven by deal ramp-up, deployment of freshers and cross-currency tailwind partly offset by extended attrition. We look at the near term as a cyclical blip in a structural demand and recommend being selective in Tier-I companies since the scale of operations is better in such an environment and given the shift in the CY23F IT spending landscape from growth to cost take-out.
Do you think India and China are going to be fastest growing markets in 2023?
China and India are expected to be the fastest-growing markets in 2023 and in India, companies with domestic exposure are better investment opportunities in 2023. China world’s second-largest economy has seen equities decline by two-fifths since June 2021 due to its strict zero-covid policies, turmoil in the real-estate industry and actions against tech firms is now bouncing back, but beyond the spending, to recovery, the market is still uncertain however, India is clear in terms of improving its infrastructure and implementing reforms and policies to ease doing business.
China’s outlook had been surrounded by pessimism, and India was surrounded by optimism due to pent-up urban demand after the pandemic and resilient stocks despite the advanced economies aggressive monetary tightening. The reopening of the Chinese economy is important for the rest of the world and as a preference to reduce dependence on China and the political stability in India will drive both economies to grow at a faster pace in 2023.
What the key reasons for current consolidation in the market? And do you expect the market to end current calendar year with 10-15 percent gains?
The market has been consolidating for the past two weeks looking forward to quarterly earnings and the budget to guide the direction. We are optimistic about India’s superior growth profile relatively due to its structural factors, such as PLIs, FTAs, alternate technologies/fuels, domestic demand, favourable government policies, and healthy balance sheets (BS) of consumers, corporates, and banks.
We expect volatility in the first half of 2023 due to a slowdown in global growth and a downturn in advanced economies. Inflation is moderating and interest rates are likely to peak in US and India, the dollar is expected to weaken, and emerging markets are to witness inflows. The rest of the year is expected to be better for domestic equities and indices over the long term are expected to grow along the lines of growth in earnings.
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