Post-budget themes

The budget offers sops to boost infrastructure and rural consumption, re-energise the power sector and grow the education-focused industry, among others. Some of these can be potential theme plays in the stock market

Post-budget themes
In his single-minded focus on reining in fiscal deficit, finance minister P Chidambaram may have avoided big-bang announcements that could lift stock market sentiments, but he still left room for smart investors to hunt pockets of opportunity.

Dissecting the budget document, analysts have pointed out that this budget has plenty to boost rural consumption, re-energise power, fuel infrastructure revival,uplift the education and skill development sector and rejuvenate realty. Even the oil and gas sector received a huge impetus. Some of these themes can now emerge as potential goldmines for investors once the market begins to gather confidence.

Even when keeping his purse strings tight, the finance minister did allocate substantial money to the rural sector which, analysts say, would support rural consumption, and create demand for auto — especially two-wheelers — FMCG, telecom and white goods.

“A 29.4 per cent increase in the government’s plan expenditure for FY14 over FY13’s revised estimate is likely to support consumer spending and year-on-year revenue growth rates for the sector in FY14. We expect rural spending and small discretionary spending to be supported in FY14 by this higher plan expenditure,” said Rakshit Ranjan, an analyst with Ambit Capital.

Kotak Securities expects Marico, Godrej Consumer, HUL and ITC to benefit from this. According to Dipen Shah, head of research at Kotak Secutiries, FM’s commitment on GST is a piece of great news for FMCG companies as it will allow greater parity with the unorganised sector apart from bringing in huge supply-chain benefits.

Some analysts also see a potential investment theme in the budget’s focus on education and skill building with some 17 per cent increase in allocation. In fact, most education sector stocks, such as Everon Education, Aptech, Zee Learning, Educomp Solution and Core Education had rallied immediately after the budget, though they fell later when the broader market turned weak.

Power is another theme emerging out in the post-budget market after prolonged sluggishness following an emphatic statement from the finance minister in the budget that coal price pooling would be introduced to address the scarcity of coal in the country. The extension of tax benefits under Section 80IA, and emphasis on restoring power distribution companies to financial health are big positives for the industry.

“Once this measure is actually introduced, the main beneficiaries will be private sector power companies most reliant on domestic coal such as Indiabulls Power, JP Power, Lanco, Reliance Power and Adani Power (in that order). In the public sector, the biggest beneficiary would be NTPC,” said Ambit Capital power analyst Harshit Vaid.

The sops for the green power industry, in the form of generation-based incentive worth Rs 800 crore and low-cost funds from the National Clean Energy Fund will boost wind energy plays such as Suzlon. The budget creates a real chance for the long-awaited revival of the infrastructure sector, with plans for the development of industrial corridors, setting up seven smart cities, facility for tax-free corporate bonds to facilitate investment in infrastructure, the strong focus on the road sector and also incentives for shipyards.

Nitin Bhasin, an infrastructure analyst at Ambit Capital, however says he does not see any material impact of these announcements on any of the E&C and infrastructure companies. “But execution and inflows will marginally improve next year for the sector and this will favour the companies that are competitive and have strong balance sheets. Improved execution will lead to stable margins and reducing interest costs will lead to higher earnings growth than revenues,” he said.

“A lot of emphasis has been given on reviving the infrastructure sector by announcing new projects as well as an infrastructure board to clear disputes hampering the completion of already initiated projects. These will be positive for the infrastructure sector,” said Amisha Vora, joint managing director of Prabhudas Lilladher.

The new subsidy math positions the oil and gas favourably, as contrary to expectations the government has created a reasonable provision for fuel subsidy for FY13-14 and has not levied any customs duty on crude imports. This would improve visibility on the subsidy-sharing mechanism and drive re-rating of ONGC and Oil India, Indian Oil, HPCL and BPCL.

The government also announced that oil & exploration policy may move from profit-sharing to revenue-sharing mechanism. Ballab Modani and Nitin Tiwari of Religare Capital Markets said the clarity over natural gas pricing will be another booster. “If the government implemented Rangarajan Committee’s recommendations then the same would be earnings accretive for ONGC, Oil India and Reliance Industries. Every $1/mmbtu rise in gas price increases the EPS of ONGC, OIL and RIL by Rs 2.4, Rs 5, Rs 2 per share, respectively,” they said.

This apart the clearance to the stalled NELP blocks, and the proposed shale gas policy are other positives for the industry. Apart from Reliance Industries, ONGC and OIL will benefit from the new gas pricing mechanism when it takes effect.

Last but not the least, the real estate industry, received a fair dose of incentives, creating conditions for a rebound. The rural and urban housing fund and additional tax break for properties valuing up to Rs 40 lakh and having a loan component of up to Rs 25 lakh are expected to push low-cost housing, while the lower abatement for luxury houses, the additional 5 per cent surcharge on tax outgo, the TDA on the transfer of immovable properties and the excise duty on marbles proved to be negatives, especially for the biggies.

“Overall, the budget in itself would not be a positive for the market, in our view. We continue to hold defensive growth, exporters and sectors benefitting from specific reforms. Our sector overweights are FMCG, media, IT services, oil & gas, power and banks. Our underweights are construction, cement, autos, capital goods, metals and telecom,” said Prabhat Awasthi of Nomura India.

bijoysankar@mydigitalfc.com

(With inputs from Amit Mudgill)

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