Monday, February 2, 2015

Budget 2016- Great Expectations?


In less than a month, the BJP government will present its first full budget.  Even with no changes, the financial numbers should look reasonable enough, given that the external environment of falling Oil and commodity prices will give a much needed fillip to our un-resolvable fiscal deficit issue. I would be looking for some key policy actions (which logically should happen outside of the budget) that will mean some change. Small tinkering with taxation rates (whether excise or customs duties) are a normal quid pro quo to drive some vested interests and these are part of any and every budget. I will be looking for changes that will impact the industrial environment in a way that it will set the base for a higher growth rate in business and profits that the businesses can make.
The last budget, though an interim one, simply extended the shelf life of the budgets being formed by the previous government. At one level, there is some concern that the new regime is simply trying to tinker with the policies and actions of the previous government instead of thinking afresh.
For example, the “Make in India” slogan would logically be backed by the government encouraging new investments in manufacturing. This phrase can be widened to include majority ‘foreign owned’ companies to operate out of India. It is a reasonable assumption given that we have no technology to set up anything relevant in the manufacturing space. This would mean changes in labour laws.  In India, it is a very complex affair to shut down a manufacturing unit. Every politician sees a potential vote bank issue and will resist closure of units. What the government and the militant trade unions have to understand is that unless they stop their shenanigans, no one is interested in setting up a factory in India, simply because the local government wants investments in the country.
The government should logically be giving a boost to manufacturing sector and also a big push to the infrastructure segment. Hopefully, this government will not give in to the builder lobby and give them any incentives.  This sector is a simple ‘integrity’ test for every government.
Given all this, I think that the beneficiaries of the budget would be those companies that are engaged in infrastructure building (steel, cement, contractors, etc) and capital goods manufacturers. Maybe there would be a boost to some defence contractors too. There could be policy shifts which also benefit the real estate sector, given the high nexus the sector has with every colour of government. I do not expect any tinkering with the taxation rates. I do not expect any other sector to specifically be impacted. There would be ‘consequential’ favourable impact on the banks. This government seems equally keen to maintain the socialism face so I do not expect any bold moves on privatising state owned banks or PSUs.
So if there is a play for prices in this budget, it would be mostly in those sectors that are in infra and capital goods manufacture. Real estate could gain due to the rub-off impact of overall wellness feeling.
Interestingly, I see gains only for those sectors where the earnings quality is always suspect.  Also, most of the players are saddled with huge debts. Most of them should go in for liquidation, but will be allowed to survive by a benevolent system of banking. So, the opportunity, at best would be a ‘trading opportunity’. Buy before the budget and sell on budget. Most of the companies in infra or capital goods would not qualify as ‘investment’ stocks, in my scheme of things. However, given that markets are generally immune to quality of earnings in the short term, there would be some upside potential in these infra and capital goods stocks. I am not suggesting that we buy simply because the prices are far below their historic highs and hence offer some margin of safety. I find that our markets are well priced and upsides are possible only when there is augmented anticipation. So remain alert on trades that you make on this budget. There are no value investments in the market now and there are only trading opportunities. And there is a downside potential should the budget fail to impact our bets. So have the stomach to bear losses. And when one trades, one has to be sure to get out of the trade, profit or loss. Holding on to something simply because it went below your purchase price is a sure way to destruction of wealth.

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