Expect Budget to be positive for capex-driven sectors, says Amish Shah

Capex as a percentage of Budget expenditure was 18 per cent in FY17 and FY19. Now, it has come down to 16 per cent… There is scope for capex allocation to go up, says Shah

The government has ammunition left on both fiscal and monetary sides, says Amish Shah, India Equity Strategist & Co-Head, India Research, BofA Securities. He tells Samie Modak, capex spending, bank recapitalisation, and PSU restructuring policy are some of the key things to look for in the Budget. Edited excerpts:

How do the markets appear from a valuation point of view?

Valuations are now high. If US stimulus comes through, the market will continue to rally on the back of liquidity. Our year-end Nifty target is 15,000. We expect full-year returns to be in single digits.

Besides global liquidity, is there any other tailwind to push the markets higher?

I would say, it is mostly liquidity. Earnings growth has been factored in. If you look at the consensus earnings for FY22, the Street is expecting 40 per cent growth, and further 20 per cent in FY23 for Nifty companies. From now to the next couple of years, the Street is already factoring in 70 per cent kind of growth. I believe corporates will be able to achieve this. But to expect positive surprises beyond that is difficult. So, the earnings story is largely known.

Given the record, do you think there is a big risk to the 70 per cent earnings growth estimate?

For some sectors, yes. But for certain sectors, we are even expecting further upgrades. At BofA Securities, we are expecting 34 per cent and 19 per cent earnings growth in FY22 and FY23, respectively. So, we are slightly below the consensus. We think there is a possibility of further upgrades for the financials and industrials pack. These two sectors will surprise the market positively. On the other hand, for consumer discretionary, there is a risk of downgrades.

Do you expect the Budget to be a big event for the markets?

For certain sectors, the Budget will be quite critical. We expect it to be positive for the capex-driven sectors, and that explains our overweight stance on the industrial space. We are looking at two-three data points. Capex as a percentage of Budget expenditure used to be 18 per cent in FY17 an wn to 8 per cent. We do think that it will come down further. This will also create more room to increase allocation to capex. Also, there is scope for an increase in PSU capex. A lot of PSUs have surplus cash or their balance sheets are under-levered.

Do you think there is room for fiscal expansion?

Our economists believe the government will continue with the expansionary policy. For FY22, we expect that the government will work with 5 per cent fiscal deficit target -- higher than 3.5 per cent that they had pre-Covid. An expanded fiscal deficit creates room for higher government infra capex. There is a possibility that the government will recap PSU banks either through recap bonds, RBI reserves, or creation of a bad bank. This will help boost loan growth as suddenly they will have more capital to lend & in turn help revive the economy.

There is also a possibility the government may put into action the PSU restructuring policy that it announced as part of the Atmanirbhar policy in May last year. The goal is to have at least one PSU and a maximum of four PSUs in strategic sectors. This will enable the government to open up other sectors to private or even foreign competition. We expect the government to put some contours to that policy. This will lead to the opening up of a lot of sectors that are government monopolies. There are levers available with the government on both fiscal and monetary sides. Plus, the economy is recovering well.

Why are you overweight on financial stocks?

We believe loan growth will surprise on the upside. Until the June quarter, one of the concerns after Covid-19 was that there would be a spike in NPAs and banks wouldn’t have enough capital to take such large NPA provisions. Since then, most large banks and NBFCs have done large fundraising. Because of this, most concerns around low capital adequacy have been taken care of. The September quarter results have shown concerns around a spike in NPAs were overblown. Earlier, the expectation was that banks in FY21 would have to provide 5 per cent of their loan book as provisions for potential NPAs. In reality, credit costs for most banks are likely to be in the range of 2.5-3 per cent. In the FY22, we think this number would be even lower at 1.5-2 per cent. So now the debate has moved to loan growth. For the sector, loan growth is just 6 per cent. In FY22, we think the number will go to 9-10 per cent. At that rate, some large banks would be able to deliver 13-18 per cent loan growth.

What’s the reason for the underweight stance on the technology sector?

We don’t expect IT to do well incrementally. The sector is doing well right now and we are not expecting any negative surprises. But at the same time, we are struggling to find incremental positive surprises. We see two potential risks: If corporate taxes in the US are raised by the Joe Biden-administration, there is a fair possibility US companies may cut their tech budgets. The second concern is that the US dollar will weaken versus the rupee. Given that IT companies’ revenues are largely in dollars, a depreciating dollar is a bad news. Also, the sector is now trading at peak valuations. All of this put together, there is potential that the sector may underperform.

Do you think a further weakness in the dollar can be a tailwind for equities?

To a large extent, that view is factored in. The markets have priced in $/Rs of 70.5. Of course, if the rupee does even better, it can be a tailwind.