Dalal Street Voice: Reliance Securities' Lav Chaturvedi lists hits, misses of Budget; sees 20K on Nifty50 by December 2022

Lav Chaturvedi, ED, and CEO of Reliance Securities said he expects the Nifty50 to enjoy premium valuation for the next 1-2 years on the back of higher earnings CAGR (before reaching a stable earnings pace of growth), as India becomes a preferred destination for global manufacturing, going ahead.

Lav has an MBA from Syracuse University, New York. He is also a Chartered Financial Analyst from the CFA Institute, USA.

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In an interview with Zeebiz's Kshitij Anand, Chaturvedi said that the biggest positive of this budget is sustaining growth momentum through job creation as the key focus areas of the government. Edited excerpts:

Q) What is your take on Budget 2022? Do you think it managed to address the growing needs of Asia’s third-largest economy?

A) We believe that the finance minister presented the budget to fire up growth in Asia’s third-largest economy, as it stages a world-beating recovery from the pandemic.

FM has a proposal of annual spending to an elevated level of 39.5 trillion rupees ($529 billion) to support growth plans is the biggest trigger.

In our view, the government has hit the right spot amid fiscal constraints by focusing on infrastructure development, which should essentially aid several ancillary industries.

The Finance Minister tried to ensure all necessary measures in place to support development activities by sharply increasing capital expenditure by 35% for FY23E, along with a higher allocation for infrastructure projects.

Despite state elections around, the government has chosen a bolder path, highlighting its resolve to give growth the impetus by focusing on infrastructure and CAPEX.

Q) Where do you see markets heading post markets – fresh record highs? Any specific target that you have for December 2022 and why?

A) Our year-end 2022 target for Nifty is 20,000 at 22x FY24E earnings. We expect Nifty to enjoy premium valuation for the next 1-2 years on the back of higher earnings CAGR (before reaching stable earnings pace of growth), as India becomes a preferred destination for global manufacturing, going ahead.

This trend would continue over the next 4-5 years, supported by the China+1 policy and the government’s supportive policy framework for various industries.

Despite near-term headwinds in terms of the Fed’s rate hike, high inflation, rising commodity cost, and FPI outflow, we are constructive on India’s long-term structural story.

Q) The Budget 2022 bet big on infra which would also mean higher job creation as well as more loans. So, will that bring PSU banks under focus?

A) The Budget tried to propel economic activities by increasing allocation towards infrastructure development. While capital expenditure has been increased by 35% to Rs7.5 trillion in FY23 and a 10% upward revision to FY22 estimates, the cumulative budgetary support for Roads & Highways is more than doubled to Rs1.34tn.

Revival of infrastructure development activities will propel the growth of several ancillary industries and ensure job creation, which is the utmost imperative for the economy.

As far as infrastructure is concerned, the government has a singular focus on the “Gati Shakti Plan”, which is aimed at easing the movement of people and goods. All these have a multiplier impact on business activities and job creation.

This would certainly encourage private CAPEX and investment resulting in an increasing need for loan funds to execute projects. This would bring traction in PSU banks going forward.

The government has lowered the amount set aside for bank recapitalisation to Rs 150bn in the revised estimates for FY22 from Rs 200bn in the Budget estimates.

There is no fresh provision for capital infusion into public sector banks in the Budget for FY23 amid improving capital ratios at state-owned lenders.

The absence of capital allocation for public sector banks reaffirms confidence in the strength of the banking sector in meeting the credit needs of the economy.  Moreover, in the last five years, Rs3300bn has been infused into PSBs.

Additionally, few large PSU banks have already raised resources from capital markets and many others have announced plans to raise resources. All these factors have improved the financial health of the banking system (PSBs).

Q) What is Good, Bad, and Ugly on Budget from a stock market perspective?

A) Good

o   Biggest positive of this budget is sustaining growth momentum through job creation as the key focus areas of the government. Necessary measures are in place to support development activities, backed by sharp increase of 35% in capital expenditure for FY23E. This along with a higher allocation for infrastructure projects, preference to higher growth over fiscal discipline is well cheered by the market participants.

o   Growth through energy efficiency and focus on climate through strong attention on renewable energy, EV ecology and digitization are few other highlights.

o   The government’s various measures in terms of extension for start-ups, digitization across the segments, raising the basic custom duty rates in a phased manner to promote localisation are key announcements on Make In India front.

o   One of the key points is that this budget for the first time ever has rolled out a vision for the next 25 years and not focus just on the annual plan!

-         Misses

o   No change to the existing income tax structure as against expectation of partial relief due to COVID-related expenses and extra cost on work from home working model. The common man is viewing this as a disappointment.

o   Any income from the transfer of virtual digital assets will be taxed at a higher rate of 30% from now onwards as against lower tax rates for capital gains of other assets. Moreover, gifting is also included under this ruling.

o   Discontinuation of a concessional tax rate of 15% on dividend received from foreign subsidiary may discourage Indian parent company to bring back money to home country through dividends.

Q) Budget 2022 was tabled that would address the needs of the economy for the next 25 years. Investors, who invest in 2022 should ideally have a time horizon of 10-20 years?

A) Budget has certainly laid the foundation for next 2-3 decades on few specific sectors i.e EV Batteries, Renewable energy, Digitisation. Investors with a time horizon of 10-20 years should focus on these sectors to play a decadal theme.

As a downside risk, inflation and yields must be watched out for. Price Stability and reasonable borrowing cost play a major role in overall stability and development.

Q) What was in store of mutual fund investors post Budget 2022? Has anything materially changed?

A) No material changes are noticed in any taxation or policy framework for mutual funds in this budget.

However, in the MF industry, various fund houses are in the process to launch sector-specific funds to play themes, based on the government’s thrust on specific sectors. Thematic funds are focusing on various themes like Infrastructure, renewable energy, EV ecology, etc.

Q) Why are fund managers chasing infra as a theme as post the budget we saw many thematic funds related to infra being launched by fund houses? Will infra be the theme of the next decade?

A) Yes, infra is the theme for the next decade with a special focus on CAPEX and construction. Focusing on infrastructure development and focus on higher infra spend has a strong multiplier effect on business activities.

A 35% increase in CAPEX and over 100% jump in allocation to highways and road construction are the key triggers for the huge potential for the sector in FY23.

Moreover, the valuation of infra companies around <20x FY24E earning provide comfort to investors on fresh investment in this sector.

All these parameters coupled with huge potential for infrastructure in a country in terms of roads, highways, metro, bridges, and railways will provide ample opportunity for next decade.

Q) Budget has a special focus on renewable and as well as a green theme? How will green bonds help support the infrastructure theme? Will the role of the ESG theme become more prominent?

A) Yes, the role of the ESG theme is becoming more prominent in India gradually. The government is looking at growth through energy efficiency and restricting climate change through strong attention to renewable energy, EV ecology, and digitization. EV is the next big theme in India.

Sunrise sectors with due importance to support climate change received the maximum allocation. Renewable energy, electric mobility and infrastructure development have received the maximum attention.

Green bonds would play an important role on funding the expansion as well as supporting new-age tech-based green energy companies. Getting seed capital during the initial phase of business for these ventures is a key challenge.

Therefore, the government’s support through green bonds funding would be the key lifeline to these companies. The government would frame a Battery Swapping Policy to allow EV charging stations for automobiles as a step towards rapid electrification.

Besides, the private sector will be encouraged to create sustainable and innovative business models for battery and energy as a service, improving the efficiency in the EV ecosystem.

Most importantly, Rs195bn of additional allocation for PLI for manufacturing high-efficiency solar modules is provided in the budget.

This would create new-age infrastructure for green energy and EV ecology over the next decade. We believe that renewable energy and EV ecology would be themes of the next decade.

Q) Any big themes that you think are emerging post Budget 2022?

A) Couple of big themes:

1.       Investment in Capex driven capital goods companies and companies based on EV ecology

2.       Not to be populist but be progressive!

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