We believe the government can achieve its target for FY21, but it would largely depend on the stake sale of insurance behemoth LIC.
There were a number of announcements made in the Budget to attract foreign investors. These include raising of FPI limit to 15 percent from 9 percent earlier, tax breaks on Sovereign Wealth Funds on their investments in sectors like infrastructure, and the abolition of DDT, Ajit Mishra, VP Research at Religare Broking said in an interview to Moneycontrol's Sunil Shankar Matkar.
Edited excerpt:
Q: What are your thoughts on Budget considering the current economic slowdown and what is your rating out of 10?
The government had limited scope to dole out any surprises. Yet, the government tried to balance by catering to the needs of all sections of society and at the same time provided fiscal stimulus. However, the budget failed to meet high market expectations hence we would rate it has 7.
Q: What are the major Budget positives that market ignored and what are the things that dampened investors mood?
The government announced measures such as. 1) Changes in personal income tax, wherein the individual has to choose to pay taxes based on old rates with exemptions or new rates without exemptions. This should help in generating more disposable income in hands of middle-class depending upon individuals’ income. 2) Abolition of dividend distribution tax seems to be positive for corporations such as MNC's and PSU while at the same time the taxes are to be borne by shareholders which seems to be negative from the shareholder's point. 3) Also, the budget failed to provide any relief on LTCG front, this has dampened investors’ sentiments. 4) The government allocated additional funds in sectors such as agriculture, infrastructure, etc. however no major reforms were announced in the real estate sector which left investors unhappy. 5) The government planned its disinvestment target of Rs 2.1 lakh crore by FY21, through partial stake sale in LIC. If the disinvestment target is met then it would be positive for the Indian markets in the long term. Also, it is expected to attract more foreign investments.
Q: What are your top five fundamental picks after the Union Budget 2020, which could give more than 20 percent return by next budget, and why?
The proposed cut in income tax rates as well as cut in customs duty is likely to enhance the purchasing power of the middle class. Hence, Subros will benefit going forward.
Expansion of warehouse, proposal of launching Kisan Rail for a seamless national cold supply chain for perishables is positive for rail companies like Container Corporation.
An increase in allocations towards large infrastructure projects for smart cities and Rs 102 lakh crore infrastructure plan would be positive for all infra companies but L&T would benefit the most in the long-term.
The announcement to encourage the manufacturing of mobile phones, electronic equipment and semiconductor packaging would boost domestic manufacturing and attract large investments in the electronics manufacturing sector. So, Dixon Technologies would benefit the most as it one of the electronic company who manufactures goods domestically.
The abolishment of the dividend distribution tax is positive for PSUs like Coal India as well as for MNCs like P&G, HUL, etc.
Q: How do you read the Budget from stock markets and investors perspective?
From the stock markets perspective, the Budget was more of a mixed bag with few hits and few misses as the expectations were too high. The expenditure outlay provided for agriculture and allied industries is likely to boost agriculture income and rural demand and therefore, in the long run, it is beneficial for agriculture and other consumption-driven sectors like FMCG and consumer durables.
On the other hand, an upward revision of fiscal deficit target (in the backdrop of inflation concerns) makes a rate cut in the upcoming monetary policy unlikely which will negatively impact the market sentiments.
On the taxes front, while the abolition of DDT will mostly have a positive implication and lead to an increase in fund flows, no change in LTCG tax was a letdown. Further, on the personal tax front too, for any material increase in disposable income (as a result of tax savings in the new tax regime) leading to increase in demand, it remains to be seen how the investors adapt to the new tax regime.
Q: Do you think the 3.5 percent FY21 fiscal deficit target set by the government looks achievable?
The government primarily plans to meet its fiscal deficit target by achieving divestment of Rs 2.1 lakh crore for FY21 on the back of stake sale in state-run companies. It is looking at IPO of LIC, stake sale in Air India, BPCL and IDBI Bank as well as by consolidating PSUs in the oil & gas and power sector. Having said that, there have been quite a few instances in the past when the government has missed its divestment targets, which could be a hindrance to the fiscal consolidation that the government is aiming at. Further, the increase in GST collections if there is an improvement in the economy may support the government in meeting the fiscal deficit target.
Q: Do you think the government will be able to achieve its Rs 2.1 lakh crore divestment target though LIC IPO, IDBI stake sale etc?
The government has set a tall target for FY21 for disinvestment. However, it is to be noted that the government had set a target of Rs 1.05 lakh cr for FY20 and have now revised it lower to Rs 0.65 lakh crore. We believe the government can achieve its target for FY21, but it would largely depend on the stake sale of insurance behemoth LIC.
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