Dalal Street Voice: Budget likely to remain pro-growth; IT, Cement among 7 themes that will dominate 2022: Hemang Jani

Hemang Jani, Head Equity Strategy, Broking and Distribution, Motilal Oswal Financial Services Ltd said that the Union Budget is expected to continue with its pro-growth policy initiatives of last year and is thus lending support to the market momentum.

In an interview with Zeebiz's Kshitij Anand, Jani said that in terms of sectors, infrastructure, capital goods, cement and real estate could be in limelight amidst efforts to revive CAPEX. Edited excerpts:

Q) What is your call on markets? Are we seeing a pre-budget rally that helped Nifty climb 18000 levels?

A) For full year CY21, the Nifty recorded an impressive 24% YoY gain despite severe COVID-related challenges. The gains were largely driven by economic recovery and positive earnings surprises which led to rerating and rally in the market.

Going ahead, we continue to remain optimistic, supported by, continuation of economic recovery and strong earnings growth.

The Union Budget is expected to continue with its pro-growth policy initiatives of last year and is thus lending support to the market momentum.

Even FII flows have somewhat returned back in the month of January. Meanwhile, the third COVID wave so far, seems less severe in terms of mortality and hospitalization, and is thus a big relief for the market.

However, one needs to keep a close watch out over how the situation pans out.

Further, there could be some market volatility witnessed as the focus of central bankers across the world has shifted towards inflation and monetary policy normalization.

Q) What are your expectations from Budget 2022? Do you think the government will be able to meet its divestment target?

A) We expect Budget 2022 to carry on with its pro-policy initiatives, continuing last year’s momentum. Apart from announcing various initiatives in the last budget, the government announced several initiatives/reforms throughout the year.

Thus, the big-bang announcements might be limited, but the underlying budget is expected to be positive. The budget is likely to stay with its focus on fiscal discipline and calibrated spending to revive growth.

Increased public spending, focus on job creation, and boost to manufacturing sector including auto sector are some of the wish list from the budget.

In the absence of any direct stimulus given to the public, the government might have to focus on increasing its spending especially on the rural side which has suffered a lot.

Availability of fertilizer and release of subsidy would be critical to reviving the rural economy which is important for various sectors including FMCG, Auto, etc.

With five state elections scheduled in March/April 2022, some populist measures targeting specific States could also be expected. The disinvestment/asset monetization agenda will continue to be the focus area in this budget too.

However, the government might fall short of its divestment target of Rs1.75 lakh crore for FY22. So far it has been able to fetch about Rs 12,300 crore through a stake sale and privatisation in this financial year, which includes divestment of NMDC, HUDCO, and SUUTI stake sale in Axis Bank, among others.

It is further looking to garner ~Rs1 lakh crore from LIC IPO which is targeted towards FY22 end. However, some of the big-ticket divestment like BPCL, IDBI is unlikely to happen this fiscal, though the government has taken various steps to remove hurdles in their process. Thus, they might get concluded next fiscal.

Q) Which sectors are likely to grab limelight in this Budget 2022?

A) In terms of sectors, infrastructure, capital goods, cement, and real estate could be in limelight amidst efforts to revive capex.

Healthcare sector could be another sector that could continue to be focus given the ongoing Covid-19 situation. Apart from these agriculture and allied sectors could see some announcements given rural slowdown.

Apart from various PLI schemes announced to boost Make in India, Government could announce more measures to boost manufacturing sectors.

Q) December MF data was quite encouraging especially from an equity funds perspective. What is the kind of number you foresee for SIP which has already clocked Rs 100bn?

A) Net inflows in equity schemes more than doubled sequentially in the month of December. It stood at Rs25k crore. This was driven by strong inflows in equity, hybrid, and other schemes, while Debt schemes saw outflows.

Funds raised in new fund offers (NFOs) stood at Rs12.5k crore, indicating strong flows in existing schemes. This trend has been continuing for the past couple of months.

The number of folio additions remained strong at 3.2m. SIP flows reached new highs of Rs11.3k crore - growth of 34% YoY/3% MoM. SIP accounts opened up during the month stood at ~1.3m.

We believe this trend of strong SIP flows would continue as retail participation is scaling new highs and they have displayed immense discipline and confidence over the past 20 months to stay invested in the market despite huge market volatility.

Q) In terms of valuations how are we placed among the Emerging Markets?

A) Nifty recorded an impressive 24% YoY gain in 2021 and outperformed most of the global markets, despite severe COVID-related challenges and multiple headwinds on the supply side.

Resilient corporate earnings, consistently strong domestic inflows in the equities and a highly successful COVID-19 vaccination program drove the outperformance.

The high-frequency data (such as GST, e-Invoices, Power demand, Toll collections, etc.) have consistently improved in 2HCY21. Exports continued to impress with USD300b of merchandise exports in 9MFY22. GST collections have been robust and averaged INR1.3t/month in 3QFY22.

Meanwhile, the US Fed’s shifting focus to combat inflation by doubling the tapering and potential rate hikes in CY22 has led to heightened volatility in emerging markets. With Omicron spreading worldwide, it will be interesting to see how global Central Banks navigate monetary policies in the short term.

India outperforms MSCI EM index in CY21 by 27%. Nifty CY21 performance was the best in the past four years, so despite valuations being at a premium, the outperformance continues across EMs due to strong earnings revival.

Q) What are your top investment themes for 2022 and why?

A) The long-term fundamentals remain intact and thus one should adopt a bottom-up strategy, as we expect stock/sector-specific momentum to continue.

IT, Telecom, Cement, Capital Goods, real estate are some of the sectors which would continue to report strong numbers.

·        IT: we expect tech spending to remain a critical enabler for enterprises to transform in preparation for the new normal. Indian IT companies expect native cloud applications to continue to be major growth drivers over the long term.

·        Telecom: We believe CAPEX should increase with the gradual unlocking of the economy and to deal with the rising data demand seen in the last few quarters, post monsoon. Further tariff hikes taken recently would result in ARPU improvement for the players.

·        Capital Goods: With the opening up of the economy, the Capital Goods sector is witnessing strong traction due to a) healthy order inflows across companies, b) rising execution levels in key projects, c) the improving liquidity situation, and d) spending by the central government.

·        Real Estate: We believe real estate is on the cusp of an upcycle with several macro factors supporting like low-interest rates, benign prices, and rising affordability coupled with low homeownership in India.

·        Cement: We maintain our positive view on the cement sector as we expect an improvement in the demand scenario, led by government Infrastructure activity and a pick-up in demand from the Real Estate sector.

There is also scope for some of the undervalued sectors which can see some recovery in business as well as market interest.

Banking and Auto are 2 such sectors that have underperformed the market so far – but have the potential to turn out the dark horse in 2022.

·        Banks reported a healthy performance on improved business growth and asset quality trends, resulting in earnings beat across most of the sector. We expect this growth momentum to continue as economic activity recovers, further aided by the festive season. Along with a low cost of funds, this would support margins.

·        In the case of Auto, the semiconductor shortage as well as the intensity of commodity cost inflation is expected to improve from 2HFY22. We prefer 4Ws over 2Ws on the back of strong demand and a stable competitive environment.

Q) Do you think election outcome will have any bearing on Indian markets?

A) With 5 State elections scheduled in March/April 2022, we may see the announcement of some populist measures targeting specific States in the upcoming budget.

Especially UP is the most important state that would go into the election this year and the outcome of it would have a bearing on the market.

It would be important to see in which all states BJP is able to retain majority especially UP which could affect the formation of government at Centre.

It could impact the market sentiments in the short term and the market could be volatile during the election time though in the long term only fundamentals and earnings would drive the market.

Q) Renewable and EV became popular themes in 2021 – how do you see the trend in 2022 and which companies are likely to benefit from these themes?

A) The popular themes of green energy comprising EV and Renewable in 2021 is likely to continue in 2022 and over the next few years.

The EV adoption is seeing massive growth (though on a small base) and would continue to witness structural growth following various government policies announcement to push EV purchase while OEMs are stepping up CAPEX to capture this transformational change.

Though the shift would be gradual it provides a huge scope of growth. Some of the companies likely to benefit are Tata Motors, Sona Com, Greaves Cotton, etc.

Apart from EV, Renewables is also seeing a structural shift and is likely to continue over the next few years. Currently, India has 101GW of renewable energy and plans to take it upto 523GW by 2030. Few companies in this space are Tata Power, Adani Green, JSW Energy, etc.

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)