Dalal Street Voice: Undervalued stocks from construction, metals, PSU Banks to benefit from Budget 2022: Shrikant Chouhan

Shrikant Chouhan, Head of Equity Research (Retail), Kotak Securities Ltd said that undervalued stocks from capital goods, cement, metals, PSU banks, construction, and infra would benefit.  

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In an interview with Zeebiz's Kshitij Anand, Chouhan said he expects the net profit of the Nifty50 index to grow 16.5% in FY23E and 12.6% in FY24E supported by a strong rebound in economic activity and normalization of operating conditions across sectors. Edited excerpts:

Q) Where do you see markets headed post Budget 2022? What will be a bigger driving force – US Fed or Budget allocations?

A) The Nifty50 is likely to remain range-bound between the 18500 level on the upside and 16500 on the downside.

Shortly, the focus will shift more towards results of upcoming state elections especially UP, global factors (Fed rate hike), macroeconomics, earnings, and valuations.

Q) How do you see the government managing its fiscal math?

A) The government’s FY2023 GFD/GDP target of 6.4% reflects its intention to provide fiscal support to (1) the broad economy as it recovers from pandemic-era lows and (2) specific parts of the economy (rural and urban poor households), which have seen a disproportionate impact of the economic slowdown over FY2020-22.

We note that central FY2023 GFD/GDP is much higher than pre-pandemic levels. The government’s FY2023 GFD/GDP target is in line with its stated commitment to reach 4.5% central GFD/GDP by FY2026.

The government is following a path of gradual fiscal consolidation after the sharp pandemic-era increase in GFD/GDP in FY2021-22.

Q) Which sectors are likely to benefit the most from Budget 2022 and why?

A) Capital goods, BFSI and Commodities should benefit the most as the government has budgeted a 24% increase in capital expenditure to Rs7.5 lakh cr for FY2023 with 33% YoY growth in the key sectors of housing, railways, and roads.

Q) Which stocks are likely to benefit the most from Budget and why?

A) We believe L&T to the biggest beneficiary. Also, undervalued stocks from capital goods, cement, metals, PSU banks, construction, and infra would benefit.  

Q) Any announcement you thought it stood out from the Budget speech or document?

A) The government has projected a central government fiscal deficit of Rs16.6 lakh cr in FY2023BE and 6.4% as a proportion of GDP, lower than 6.9% in FY2022RE.

The government’s FY2023 GFD/GDP target is in line with its stated commitment to reach 4.5% central GFD/GDP by FY2026. We believe this part stood out in the budget speech.

Q) How do you see the renewable space in the year 2022 post Budget announcements?

A) The government had previously laid the groundwork for promoting domestic manufacturing under Aatmanirbhar Bharat and production-linked incentive (PLI) scheme for ‘new’ manufacturing industries.

It has allocated Rs85 bn for the PLI scheme in FY2023BE. In particular, it has increased the PLI scheme amount for solar PV module manufacturing to Rs240 bn from Rs45 bn earlier.

This will result in all the interested bidders (with a planned capacity of 55 GW) qualifying for the PLI scheme. We expect faster transition of India’s electricity sector to solar electricity and help India achieve its medium-term targets for climate change and lower carbon emissions.

Q) What is your take on December quarter earnings so far?

A) Aggregate 3QFY22 earnings prints of Nifty-50 companies were ahead of expectations so far.

Q) FIIs have remained net sellers in the last 3 months at least in the cash segment and January is no different. What is the likely trend – in light of hike in US Fed rates?

A) We think the selling will continue as whenever Fed takes the decision of increasing rates, FIIs try to exit from emerging markets.  

However, it is for the first time we are seeing huge buying support from retail investors and domestic institutions.

In fact, domestic flows are one of the major drivers of Indian equities and valuations of Indian equities could remain on the higher side because of strong domestic flows.

Nifty50 earnings are strong. We expect the net profit of the Nifty50 index to grow 16.5% in FY23E and 12.6% in FY24E supported by a strong rebound in economic activity and normalization of operating conditions across sectors.

We also believe that after some time of selling, valuations will become attractive and FII will stop selling.  But in the near term, we think their selling may continue.

(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.)